CAN WE DESIGN A MARKET FOR COMPETITIVE HEALTH INSURANCE?
THE DEVELOPMENT OF MANAGED COMPETITION
The Health Maintenance Organisation (HMO), and particularly the Kaiser Foundation Health Plan
established in California in WWII, provided a model that was much admired around the world (Sax
1972; Erlich 1975; Reinhardt 2002). The HMO integrated the financing and delivery of health care
and took on the financial risk for all the health care needs of its enrollees. As health care costs in
all developed countries increased rapidly during the 1970s, the HMO model with its lower per capita
health care costs attracted much attention, including in Australia (Cunningham, Williamson 1980).
This also provided the blueprint for Ellwood and Enthoven in tackling the problems of the US
system (Ellwood, Anderson et al. 1971; Enthoven 1978a; Enthoven 1978b; Enthoven, Kronick 1989;
Enthoven, Kronick 1989). The US, as well as facing the common problems of rapidly rising costs,
had no national or universal health cover, and an increasing proportion of the US population could
not afford private health insurance, were not covered by employer based plans, or the safety nets of
Medicare/Medicaid, and so faced major problems in getting health care. So the US problem was, and
remains, how to provide universal cover without substantially adding to the inflationary pressures on
total health care spending. Enthoven and others advocated managed competition and managed care
as a means by which universal health cover could be achieved and funded from greater efficiencies
in the existing system. Health care financing in the US remains a market of competing voluntary
insurers, and the most recent attempt to provide some universality, the Clinton health reforms,
collapsed. However, managed care has grown dramatically since the 1980s and by the beginning of
the 1990s over 70% of insured Americans belonged to some form of managed care plan (Glied 2000).
Managed care covers a variety of institutional arrangements, from the traditional HMOs which fully
integrate financing and delivery, to selective contracting between insurers and providers. Whilst this
growth was no doubt spurred by managed care success in reducing health insurance costs, it was
also facilitated by changes in the political and regulatory environment which encouraged preferred-
provider arrangements and the enrolment of Medicaid and Medicare beneficiaries in these plans
(Glied 2000). During the 1990s, the US experienced modest growth in health care spending, with
the proportion of GDP allocated to health care stabilising at around 13% (Marquis, Long 1999; Glied
2000; Reinhardt 2002). However, the last few years have seen a return of the expenditure growth
rates of the late 1980s, with health care spending as a proportion of GDP reaching 14% in 2001,
14.7% in 2002, and current forecasts placing it at 17% by 2011 (Heffler, Smith et al. 2002).
The micro-economic reform environment of the UK in the late 1980s also proved responsive to
Enthoven’s ideas (Hurst 1991; European Observatory on Health Care Systems 1999). The National
Health Service had proven a very effective mechanism for controlling total health care expenditure
with a system which guaranteed universal coverage. The NHS owned, operated and directly funded
hospitals. General practitioners had remained private providers, but were paid on a capitation basis,
that is individuals had to enrol with a nominated general practice which they could choose; and
the practice was paid a fixed annual sum, based on the age-sex profile of their enrollees, to cover
all their general practice costs. After some early consideration of managed competition among
insurers, Thatcher’s attention turned to the managed care side of the model. The early 1990s
reforms involved a major restructure, separating the functions of purchaser of health care and
provider of services in the hope of engendering price-quality competition, and allowing some funds
pooling for diagnostic, out-patient and minor procedures at the level of the general practitioner.
While to some extent the purchaser-provider separation has been maintained along with a much
greater extent of GP budget holding, in 1998 the competitive internal market was replaced with
collaborative, partnership arrangements (Goddard, Mannion 1998; Le Grand 1999). The development
of private insurance alongside the tax financed system has been rejected so far (Department of
Health 2000).
New Zealand also attempted to introduce some elements of managed care within a tax-financed,
universal health system. The reforms of 1993 also introduced a purchaser-provider split, and funds
pooling was established at the level of Regional Health Authorities (of which there were four). By
2000, the purchaser-provider split had disappeared and the spirit of competition had been replaced
by one of co-operation.