How Widespread Is Managed Competition?

Originally published by the Center for Studying Health System Change (HSC). HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Stephen H. Long, M. Susan Marquis

The managed competition framework -- popularized by economist Alain Enthoven -- was built on the idea that giving consumers meaningful choices among health plans, combined with financial incentives to pick cost-effective options and access to quality information, would drive insurers to compete on price and quality. Many policy makers during the 1990s looked to the private sector to adopt this model. But findings from the 1997 Robert Wood Johnson Foundation (RWJF) Employer Health Insurance Survey revealed that few private employers had actually put the three core elements of managed competition into practice: a choice of plans, financial incentives to select economical coverage, and information for evaluating plan quality.

Limited Choice of Plans

Only 17 percent of private employers that offered insurance to their workers provided a choice among two or more health plans. Even large establishments -- those belonging to firms with 100 or more employees -- offered choice only about a third of the time. Counting by employees rather than employers, still fewer than half (41 percent) of insured workers had the option to choose between plans.

The practical reality was that most workers were simply enrolled in whatever single plan their employer had selected. Without a choice, consumers had no mechanism to reward plans that offered better value -- undermining the foundational premise of managed competition.

Financial Incentives Favored Higher-Cost Plans

Among the minority of employees at firms offering a choice, only about 27 percent faced financial incentives to shop for a lower-priced plan. Most employers effectively subsidized the price difference between plans, removing any financial reason for workers to choose the more economical option.

Specifically, among employers offering choice, 31 percent covered the full cost of employee-only coverage regardless of which plan was selected. Another 34 percent paid the same percentage of each plan's premium, meaning they contributed more in dollar terms toward higher-priced plans. Only 28 percent used the equal-dollar contribution approach that managed competition theory prescribes -- where the employer contributes the same fixed dollar amount regardless of the plan chosen, leaving employees to pay the full difference if they select a more expensive option.

Movement toward the equal-dollar model was minimal. Only 4 percent of employers that had been subsidizing premium differences in 1996 switched to an equal-dollar contribution policy in 1997. Employers showed little appetite for restructuring their contributions in ways that would push employees toward price-conscious plan selection.

Sparse Consumer Information

Both public and private efforts had been underway to develop measures that would allow consumers to compare health plans on quality, patient satisfaction, and other performance indicators. The National Committee for Quality Assurance's HEDIS (Health Plan Employer Data and Information Set) measures were among the most prominent. But the actual provision of this information to employees was far from widespread.

Among employers that offered a choice of plans, only about one-quarter of the very largest establishments -- those with 500 or more employees -- provided any comparative information beyond basic plan descriptions. This included patient satisfaction results, HEDIS data, or other performance metrics. If the biggest and most sophisticated employers were doing this rarely, smaller firms were doing it almost never.

Without quality information, even workers who had a choice of plans and faced financial incentives to shop carefully were making decisions largely in the dark. They might compare premiums and provider networks, but they had no systematic way to evaluate whether one plan delivered better clinical outcomes or higher patient satisfaction than another.

Implications for the Managed Competition Model

Many policy makers and business leaders had embraced managed competition as a path toward affordable, high-quality health care and a mechanism to slow spending growth. But as of the late 1990s, the private sector had not come close to implementing the model, even among large firms. Proposed consumer protection legislation in Congress could have changed the landscape somewhat on the information front, but the data showed that the vision of a consumer-driven competitive system remained largely unrealized.

In practice, employers rather than employees were making the decisions that shaped health plan competition. Employers chose which plans to offer, set the financial terms that determined whether workers had any incentive to shop on price, and decided whether to provide quality information. The consumer role envisioned by managed competition advocates was largely absent from the reality of workplace health insurance.

The gap between theory and practice raised broader questions about how market forces could be harnessed to improve health care. If most workers had no choice, no financial incentive to choose wisely, and no quality data even when they did have a choice, the competitive pressure that managed competition was supposed to generate simply was not materializing. Whether regulatory mandates, employer education, or new market structures could close this gap remained an open and pressing question.

Data and Methodology

This Data Bulletin presented findings from the 1997 Robert Wood Johnson Foundation Employer Health Insurance Survey, a nationally representative telephone survey of private and public employers based on responses from 21,543 private establishments. The survey was a component of Health System Change's Community Tracking Study, conducted by Research Triangle Institute (RTI) and designed by RAND and RTI with HSC's collaboration.

Sources and Further Reading

Enthoven, Alain and Richard Kronick. "A Consumer Choice Health Plan for the 1990s." New England Journal of Medicine, 1989, 320: 29-37, 94-101.

1997 Robert Wood Johnson Foundation Employer Health Insurance Survey, conducted by Research Triangle Institute.

Related HSC publications: "Who Has a Choice of Health Plans?" Issue Brief No. 27, February 2000; "Choosing a Health Plan," Health Affairs, November/December 1997.