Managed Competition (MC) among health care financing and delivery systems was first conceived as a proposed public policy to drive delivery system change in the private sector by assuring consumers that they have choices, as well as rewards for choosing high-value providers. Many legislative proposals have used MC ideas in whole or in part. The Affordable Care Act’s (ACA) exchanges reflect the MC idea, but the three percent of the population they cover is too small to drive large scale change.

The new private corporate exchanges are also based on MC. While they cover few people now, private exchanges have the potential to change the incentives for tens of millions of consumers, and — if done right — to drive large scale delivery system reform. The combination of both kinds of exchanges could be powerful.

This post puts the idea of managed competition in a historical context, then describes how private exchanges are operationalizing the concept. I conclude with a brief look at how managed competition may develop going forward, and how MC may change the health care system.

The Evolution Of Managed Competition

In 1977, at the invitation of HHS Secretary Joe Califano, I went to work for the Carter Administration as a consultant to develop a plan in response to the President’s campaign promise of universal health insurance.  At the time, I was also a consultant to Kaiser Permanente , and I was impressed by their systematic approaches to improving quality and cutting cost, and their alignment of provider incentives with the needs and wants of consumers for high-value care.  One of the main objectives I sought in designing the plan was to make America safe for high-value systems that attracted and satisfied customers.

When Carter took office, most people were locked into uncoordinated, open-ended fee for service (FFS), as many are even today. Instead, everyone ought to have the opportunity to make an informed, cost-conscious choice of both delivery system and payment system, including some that are not based on FFS.

The idea that informed, cost-conscious consumer choice could transform health care came from the observation that Kaiser’s market share in California was very high and growing in the Federal Employees’ Health Benefits Program (FEHBP) and in the California Public Employees’ Retirement System’s health benefits division (CalPERS), two examples of employer-sponsored health insurance exchanges in which everyone had an opportunity to make a cost-conscious individual choice of plan. These exchanges continue in successful operation more than 50 years after their birth.

This essential condition for getting incentives right, that the employee who chose the less costly plan got to keep the savings, was exceptional at that time.  In fact, FEHBP and CalPERS were the only two examples I could cite when people assured me that individual choice was impossible. I believed that through such exchanges, consumers would replace open-ended FFS, gradually and voluntarily, with organized systems that offer improved value for money.

I wrote a report to Califano in 1977, and in early 1978 a version was published in the New England Journal of Medicine, called “Consumer Choice Health Plan (CCHP): A National Health Insurance Proposal Based on Regulated Competition in the Private Sector.” The proposal did not include special provisions favoring any particular delivery system; I believed that the best delivery systems would do very well in a competitive market on a level playing field. In developing the report and the article, I benefited greatly from the writings and advice of Scott Fleming and Victor Fuchs.

The CCHP idea took on a life of its own, but I was disappointed that the Carter Administration made the doomed choice of seeking price controls on hospitals, rather than seeking to reform the fundamental incentives.  Ronald Reagan’s campaign manager called to say they liked the idea and offered help.  I replied that I appreciated his interest, but my priority was to get Democrats, who had majorities in both Houses, out in front. The Reagan people liked the sound of “competition” but not the “regulated,” or “managed” as I later called it.  They didn’t understand the concept. They thought it meant “deregulation.” But a free market for health insurance would not produce acceptable results. There must be rules and a structure.

In 1981, the bi-partisan duo of Richard Gephardt and David Stockman introduced The National Health Care Reform Act, a bill in the House that put CCHP into legislative language.

Fast-forward to 1992.  Congressmen Cooper, Andrews and Stenholm, leaders of the Conservative Democratic Forum, introduced the Managed Competition Act of 1992 with 17 Democratic co-sponsors. The following year, the same bill was reintroduced with 18 Republicans and 26 Democrats as co-sponsors.

The Managed Competition Act was quite simple. Its 177 pages described exchanges in each state; a limit on the amount of employer contributions that could be excluded from the taxable income of employees, set at the price of the lowest-priced plan meeting standards in each state exchange; and the budget savings translated into subsidies for low-income individuals purchasing insurance.

Also in 1993, Health Affairs published my “History and Principles of Managed Competition.” The key principles I outlined in the article were:

  • Price competition at the level of annual premium for comprehensive care, not individual items of service whose value consumers are not well equipped to judge.
  • Individual choice. With whole group choice, changing plans would require near unanimous agreement. With individual choice, some people can switch to what they see as the high-value plan even if the rest don’t.
  • “Sponsors” or “market organizers” or “exchanges” or “Health Insurance Purchasing Cooperatives (HIPCs), either private or public. The sponsors would establish and enforce rules of equity, select participating competing plans, manage the enrollment process, and create price-elastic demand by defined contributions, standard coverage contracts, quality-related information, and management of risk selection through risk adjustment of premiums and standardization of coverage contracts.

Then came the Health Security Act or “the Clinton Plan”, a 1342 page bill introduced in November 1993. People observed, correctly, that the Clinton Plan included elements of MC, including Regional Alliances (like Exchanges) and a set of comprehensive minimum standard benefits. But it also included what amounted to price controls, as if the administration did not trust the market.  It went nowhere in the Congress.  MC was not what killed it.

Managed competition and Medicare.  In 1997, in the Balanced Budget Act, Congress focused its attention on Medicare specifically. The National Bipartisan Commission on the Future of Medicare, chaired by Senator John Breaux (D, LA) and Representative Bill Thomas (R, CA), included 17 members, divided between the parties. Bobby Jindal was the Executive Director of the staff.  An 11 vote supermajority was required for an official Commission report to the President and the Congress.

The co-chairmen developed a proposal modelled on the FEHBP, combining Medicare Parts A and B, and adding a prescription drug benefit and stop-loss protection to create a standard benefit package.  Private health plans and a government-run FFS plan would compete to deliver the services in the package to Medicare beneficiaries; the government would make “premium support payments” to make the coverage affordable to beneficiaries, with special protections for people with low incomes.  On average, beneficiaries would pay 12 percent of the total cost. The proposal was estimated to yield substantial savings.

In 1999, the vote was 10 to 7 in favor of the proposal of the Chairmen, one short of the supermajority. Clinton appointees voted no.  But the idea of MC to reform Medicare and to break out of the government’s commitment to open-ended FFS didn’t die then. In November 2010, The Bipartisan Policy Center’s Debt Reduction Task Force, led by Pete Domenici, former chairman of the Senate Budget Committee, and Alice Rivlin, founding director of the Congressional Budget Office and Budget Director for President Clinton, released a report that included a “defined support” plan for Medicare based on the same MC ideas. It didn’t attract the attention and support it deserved.

In December 2011, Senator Ron Wyden (D OR), now Chair of the Senate Finance Committee, and Representative Paul Ryan(R WI), Chair of the House Budget Committee, introduced a plan called “Guaranteed Choices to Strengthen Medicare and Health Security for All,” which was generically similar to the 1998 Breaux-Thomas Commission proposal and MC. MC is an idea leaders of both parties can agree on.

Managed competition in other contexts.  To varying extents, managed competition ideas also animated proposals outside of Medicare. 2006 saw the passage of health reform in Massachusetts, “Romneycare,” which included the Commonwealth Health Insurance Connector Authority. The Connector resembled MC, but its purpose was to cover the uninsured rather than to permit market forces to drive reform of the financing and delivery system as a whole.

In 2007, the Committee for Economic Development, a nonpartisan nonprofit Washington-based think tank sponsored by business and academia, issued a report recommending everyone be covered through a system of informed, individual consumer cost-conscious choice of plans, with universal premium credits. Its concept was simpler than the ACA, but more radical in proposing to replace completely employer-sponsored health insurance with universal health insurance premium supports, regardless of job. Employer-sponsored insurance adds greatly to the complexity of getting everyone covered.

Also in 2007, Senators Wyden (D,OR) and Bennett (R,UT) introduced the Healthy Americans Act, along with 6 Democratic co-sponsors and 8 Republicans, plus Arlen Specter, who switched parties, and Joe Lieberman, an Independent. Like the CED proposal, the Healthy Americans Act would have replaced the employer-based system with universal market-based coverage. The consumer choice was to be executed through “State Health Help Agencies,” which would be exchanges in today’s terminology.

The Affordable Care Act (ACA). And of course 2010 saw the passage of the ACA, which included the much-publicized exchanges to serve uninsured individuals and very small employers. Again, the exchanges drew on the MC idea, with cost-conscious individual choice of plan but only for a small part of the population — not enough to drive most providers into forming and offering high value systems.   But the ACA proved to be so complex that neither the Federal Government nor most states could implement the exchanges without major problems. However, it is likely that the problems will be ironed out over the next few years, so millions of people will have accessed health insurance through MC.

Private Exchanges

I feared that the experience of the troubled ACA exchange rollout would give a good idea a bad name. Fortunately, its reputation is being rehabilitated by the entrepreneurial private sector

Extend Health.  In 2004, Extend Health, the first national corporate exchange, was started by Bryce Williams, an entrepreneur who heard from some of the largest employers in America that they wanted a more sustainable way to provide coverage for their workers and retirees.  They wanted a system based on individual choice and control, defined contributions, and real competition among health plans.

Williams started with an exchange for retirees on Medicare who faced many choices, including outpatient prescription drug plans, Medicare Supplemental plans, and Medicare Advantage plans. He started with the Detroit Automakers’ who had legendary retiree medical cost problems, and specifically salaried retirees and defined employer contributions. Certified health insurance counselors in the Extend Health call centers were instructed that the goal was to produce retirees who were happy with their choices, and consequently happy client companies, and not to bias advice or selection in favor of any particular solution or health plan.

Extend Health has been very successful, now serving over 400 employers and over 600,000 Medicare beneficiaries with over 100 Medicare plan carriers.  (I served on Bryce’s Advisory Board.)

In 2012, Towers Watson, a global human resources consultancy acquired Extend Health.  In November 2013, Towers Watson also acquired Liazon, a leader in private benefit exchanges for active employees. As of November 2013, Liazon’s online benefit marketplaces were distributed through over 400 insurance brokers, including 9 of the top 10 national firms.

Aon Hewitt.  In the fall of 2012, Aon Hewitt, another global human resources consultancy, launched a large multicarrier, multiple-employer private health care exchange for active employees. In the Aon model, all the carriers offer fully insured products that are experience-rated to each employment group. They offer the “four metals” of the ACA, but to facilitate consumer comparisons and choice, contracts are completely standardized within each metal category.

Today, perhaps half of employees with health coverage are in self-insured arrangements. Employers see in self-insurance such advantages as freedom from state regulation of benefits offerings, avoidance of taxes on premiums, and longer retention of cash flow.  Aon’s employer customers have found that there are significant advantages to letting insurers bear the risk of cost: compared to employers, insurers are better qualified to manage cost, and they innovate to offer less costly products such as selective networks.

In today’s typical employer model of one-size-fits all self-insurance, employers or their claims administrators are very reluctant to exclude costly but popular providers because employees liking those providers will be angered. So they can’t drive hard bargains. But when the issue is individual choice, and value for the employee’s money, the whole relationship changes. Employees willingly choose networks that exclude low value providers if it is their choice and they get to keep the savings.

To encourage carriers to take the enrollment risk premium out of their bids, Aon risk-adjusts the premiums after enrollment so that the carriers attracting the bad risks are compensated.  Aon now has 18 participating companies and over 600,000 covered lives. Their client list includes Walgreens, Sears Holdings and Darden Restaurants. A recent report says that, in 2015, AT&T will move its Medicare-eligible retirees to an Aon exchange. These numbers suggest that the scale of this activity can be large enough to have a significant impact on the total market when companies competing with Walgreens, Sears, Darden, and AT&T join the movement.

The insurers being offered on the Aon exchange include Kaiser Permanente, Aetna, Health Net, United Healthcare, and Blue Cross Blue Shield.  Their model could accommodate additional leading regional delivery systems if employers requested it for their employees.

Mercer.  In 2013, Mercer, another global human resources consultancy, announced plans to offer Mercer Marketplace. Their participating carriers include Aetna, Cigna, Humana, United Healthcare, Health Net, and several Blue Cross and Blue Shield plans. In 2014, they announced that Mercer Marketplace currently works with 67 employers to provide medical benefits to 282,000 covered individuals. Mercer uses standard coverage contracts and does not use “the metals.”

Progress and remaining challenges.  All told, these corporate exchanges now cover over 1.5 million individuals.

Corporate exchanges offer significant advantages to large multi-site employers.  Once individual choice is introduced, carriers can innovate with plans that please some, but not necessarily all employees, plans that could not be offered in the one-size-fits-all model.  Individual choice facilitates more selective networks.  Employee choices reflect their personal valuations of alternative health plans. Employees are more likely to be satisfied with a plan they have chosen for themselves.

The corporate exchange lets employers outsource management of the relationships with multiple insurance companies, and the approach lets employers convert their support to defined contributions which can be increased at a controlled, sustainable rate. The defined contribution approach gives employees incentives to make economical choices.

One important thing about the private exchanges is that they can be in the economic best interest of all participants. Private corporate exchanges are market-driven.  They can display the innovation and flexibility of the private sector, rather than the complex, politically negotiated legislated treaties that constrain the public sector exchanges. The private exchanges can hire the expertise they need when they need it, and are not bound by the complex bureaucratic public sector personnel and procurement regulations.

There are other multi-employer multi-plan private exchanges than the ones I have mentioned here that offer a good approximation to MC, for example California Choice. Not all of them conform to all of the principles I have described for MC, but self-interest and competition will drive them in that direction.

There are potential regulatory issues such as transparency regarding network adequacy, so that consumers understand what they are buying, and conflict of interest when employers seek advice from the global consultancies as to which exchange to hire.

Public policy could accelerate the reform process if the amount of employer contribution to employee health care excluded from employee taxable income were to be capped at the price of an efficient plan in each region. The competitive process could help identify what that is. That would sharpen the incentive for employees to choose efficient plans. And part of the budget savings—which could be large—could be used to allow people who do not have insurance paid by an employer to enjoy the same exclusion, thereby improving fairness, and weakening the link between jobs and health insurance.

As these exchanges roll out, a large problem will remain from the point of view of delivery system reform. Will exchanges open the market for employee health insurance to high-value regional delivery systems and to newly forming accountable care organizations (ACOs)? The FEHBP and CalPERS did just that. And will many new delivery systems form and enter this competitive market? That remains to be seen. As Jon Kingsdale advised me, the even bigger challenge than opening the market to high-value systems is to create the competing delivery systems to cover America.

It is reasonable for the exchanges seeking to serve national employers to start with a few well-known national carriers who can cover the whole country. I hope, but cannot be sure, that the exchanges will open their marketplaces to the many high-value regional integrated delivery systems around the country like Intermountain Health Care, the Geisinger Health System in Pennsylvania, the Dean Clinic in Wisconsin, Group Health Cooperative of Puget Sound, HealthPartners in the Twin Cities, Sharp Health System in San Diego, and many others, all of whom have their own affiliated health insurance plans. They would enhance the attractiveness of their product to employees and employers by doing so. The exchange structure would allow new models of delivery such as Medicare ACOs teaming up with insurers to serve the commercial market and be offered on the exchange. This possibility could strengthen the Medicare ACOs by giving them access to larger populations.

The doctors in many of these delivery systems can be accessed through the national carriers on a fee-for service-basis.  But the key point is to allow those delivery systems with their own affiliated health plans to market their superior efficiency through lower premiums.  In addition, the national carriers could develop and operate health plans to market the services of systems that do not have their own health plans.  Many years ago, there was a Blue Cross-Leahy HMO in MA. In recent years, Blue Shield of California (an independent non-profit) teamed up with Hill Physicians’ Medical Group and Dignity Hospitals to offer an ACO plan in Sacramento — for State employees in CalPERS and for City/County employers in San Francisco — with the providers at risk for cost of care.

There are reasons for cautious optimism that the combination of private exchanges described here, and the public exchanges for individuals and small employers created by the ACA, will set in motion a process that will firmly establish MC as the predominant way of buying and selling health insurance and open the market to innovative high-value systems. The last holdout may be Medicare, but it could be transformed by a version of the Breaux-Thomas Domenici-Rivlin Wyden-Ryan proposal.  Just as original Medicare copied the private sector with uncoordinated open-ended FFS, at some point in the future, Medicare may again follow the lead of the private sector.