Americans' trust of the managed-care industry has fallen almost as low as that accorded the tobacco industry, according to a recent MODERN HEALTHCARE cover story (May 12, p. 36). This managed-care credibility crisis has led to escalating legislative attacks on managed care. Unless the lack of trust is successfully addressed, the industry faces an unpromising future.
It does little good to blame other interest groups or the media for the crisis. They are merely and predictably taking advantage of vulnerabilities that managed care has left unattended.
To turn around public attitudes and policies, substantive changes are needed, not public relations campaigns. Regulation, particularly self-regulation, is one tool the industry can use to reassure Americans that the managed-care system works for them.
To flourish, American healthcare will need vibrant managed-care markets to compensate for cost increases that will result from coming waves of new, hotly demanded, expensive medical technologies. Mistrust, however, can hinder markets from functioning well.
Managed-care incentives are perceived by the public to be skewed against them. Among the most mistrusted incentives:
Keeping sick enrollees out. Since medical-care expenditures are skewed toward a few patients, a capitated organization can increase its margins greatly by keeping the chronically ill off its rolls.
Neglecting care. The public quickly grasps that there are short-term profits to be made if a managed-care company denies needed care, while the disadvantages to the company are mostly long-term and nebulous.
Unless the public is convinced these incentives are countered, the managed-care industry could retain chronic credibility problems such as those afflicting used-car retailing.
Well-designed regulatory frameworks can provide new life to otherwise foundering markets. Witness markets for financial securities: With their comprehensive regulation through a combination of governmental and nongovernmental organizations, U.S. securities markets flourish like few others.
Note that financial securities markets share an important flaw with healthcare in that, without corrective measures, the seller knows far more than the buyer about the value of the transaction.
For a dynamic industry, which healthcare is becoming, governmental regulation can prove stifling. As an alternative, industry-sponsored regulation can address technical issues in a less politicized and more responsive manner. Self-regulation by an industry can have an additional advantage of easier access to industry experts.
For financial markets the Financial Accounting Standards Board has played a key role in forcing public companies to provide high-quality information to securities buyers, thereby improving the market's credibility.
FASB equivalents for healthcare markets could target key incentive weaknesses. For example, incentives to attract healthy enrollees can be addressed through a nongovernmental organization that sets the technical, actuarial rules for risk adjusting premiums. Premiums for health insurance could be routed through an industry-run clearinghouse and then, before being paid back to participating plans, be multiplied up or down by the composite risk-adjustment factor for a plan's enrollees. As players devise ever more innovative means of gaming the system, the method of risk adjustment could be dynamically adjusted by the industry's own experts.
An advantage of this particular arrangement-one of many possible-is that it reduces the need for a government watchdog role because experts from competing companies would be vigilant in watching for new dirty tricks by other companies. Companies would be forced to agree on technical rules within a zero-sum game, where gains for some participants are fully offset by losses for others.
A similar mechanism could be used to increase incentives to invest in early and preventive care. An industry-run organization could set the rules for sharing certain medical expenses among an enrollee's current and past health plans, much as mechanisms currently exist to coordinate benefits for people with coverage from multiple health plans.
Unless self-regulation is given teeth and protects the public, it will be ineffective in improving managed care's credibility. The government can play a key role in enabling effective self-regulation by providing an overarching framework that is enforceable and allows for public oversight. For example, the Securities and Exchange Commission gives FASB greater leverage. In healthcare, government's key role would be to prod, using legal mandates or tax incentives, companies to participate in the self-regulated system.
Before it sinks in the wake of public mistrust, the managed-care industry should propose a regulatory system that builds public trust of industry incentives. While micromanagement by government would be burdensome, self-regulation with teeth and consumer protection provides a viable alternative.
With better incentives in place, the public would observe healthcare companies competing intensely to attract sick customers and to provide them with better, more efficient care. That image alone-of having the ill be attractive as customers for managed care-would increase consumers' trust that managed-care organizations will care for them when they are most vulnerable.
Hansen is president of the Hansen Network, a healthcare strategy consulting firm based in Fremont, Calif. He is also an affiliate of the Institute for the Future in Menlo Park, Calif., and he collaborates on healthcare policy issues with the Law and Economics Consulting Group of Emeryville, Calif.