The Politics of Managed Care Plans ON THE “EFFICIENCY ” OF MANAGED CARE

The claim that managed care plans are more efficient than fee-for-service plans has been made so often that it has reached the status of folklore, but the evidence is inconclusive. The claim is usually based on one or both of the following errors: (1) lower medical care costs mean lower total costs (medical plus administrative costs) and (2) lower HMO premiums mean HMOs are more efficient than fee-for-service plans. The first assertion ignores evidence indicating that managed care has driven up administrative costs for both insurers and providers. The second ignores evidence that managed care plans have numerous methods of shifting costs that are unavail-able or less available to fee-for-service plans. The lull in health care inflation during the mid-1990s is often cited as evidence that managed care is efficient. But the lull may have been caused not by the spread of managed care but by the near-simultaneous occurrence of four events: a downturn in the insurance underwriting cycle, the 1990–1991 recession, endorsement of managed com-petition by numerous politicians, and the merger fever triggered by those endorsements. From the earliest days of the health maintenance organization (HMO) move-ment, many have asserted that HMOs or managed care plans save money and are more “efficient ” than fee-for-service (FFS) plans. As a result, that notion has reached the status of folklore within a substantial portion of the health policy community. This folklore is also widely accepted among politicians. President Bill Clinton announced during his 1998 State of the Union address that “managed care plans... save money ” (1). Republican members of the National Bipartisan Commission on the Future of Medicare and other proponents of the premium-support approach to “modernizing ” Medicare assert that managed care plans are more efficient than th