Does Ezra Klein really think “managed care didn’t kill anyone”?
by Kip Sullivan, JD

Get ready for the next liberal excuse for not supporting single-payer: Managed care. Yes, the managed care that infuriated the public with its limits on patient choice of doctor and its interference in the doctor-patient relationship, that induced merger madness throughout the health care industry, and that diminished the quality of care without lowering costs.

Managed care was to the 1990s what the “public option” has been to this decade – an excuse for “yes but” Democrats to turn away from single-payer. Now that it is clear the “public option” is not the politically feasible alternative to single-payer it was cracked up to be, look for “yes but” Democrats and their allies to resurrect managed care as their excuse for not supporting single-payer.

Exhibit A: Washington Post blogger Ezra Klein

The signs that “yes but” Democrats and groups like Health Care for America Now will soon be promoting a new and improved managed care are everywhere, including the legislation they are trying to pass in Congress. The most recent straw in the wind was a brazenly revisionist piece by “public option” advocate Ezra Klein. Klein’s December 7 post called managed care a “tremendous success.”

Klein actually wrote:

This [the 1990s] was the era of the managed-care revolution, which most remember as a horrifying failure. Famously, audiences applauded when Helen Hunt broke out into a profanity-laden rant against HMOs in the movie “As Good as It Gets.” The popular backlash was so intense that by the turn of the century the managed-care experiment was virtually over. The problem with this historic failure? The data showed the experiment to be a tremendous success.

What data might this be? Klein offers none.

Instead he offers this sleight-of-hand:

From 1989 to 1995, median wages actually fell a bit. Then, managed care kicked in. Annual growth in health-care costs fell from more than 10 percent in the early 1990s to less than 5 percent in the late ’90s. Meanwhile, wages shot through the roof, rising more than 11 percent from 1995 to 2000. Then we ended the managed-care experiment, and health-care costs resumed their normal speed of growth. Predictably, wages slumped back down from 2000 to 2006. “By every observable indicator,” says Harvard’s David Cutler, “managed care was a huge success. It cut spending, cut the growth of spending and didn’t seem to kill anyone. And yet everyone hated it.”

There are at least four errors in this sloppy and specious paragraph:

(1) Managed care in fact did inflict enormous harm on many patients;

(2) the test for whether a health care “reform” proposal is acceptable needs to be a tad higher than “it didn’t kill anyone”;

(3) managed care did not “kick in” in 1995, it did not disappear in 2000; and

(4) the evidence does not support Klein’s claim that managed care caused the temporary decline in the annual growth rate of health insurance premiums that occurred in the 1990s.

Managed care did great harm

Can you imagine the uproar that would ensue if a clinic urged patients to accept an unproven treatment or drug on the ground that it “didn’t seem to kill anyone”? Shouldn’t the standard for health care reform be as rigorous as the standards we expect health care professionals to meet? But instead of rejecting, or at minimum questioning, the remarks by David Cutler (who advised candidate Obama), Klein endorsed them.

Klein’s condescending remarks notwithstanding, the American public had good reason for its hostility to managed care. Managed care – a term that refers collectively to the cost-containment tools pioneered by HMOs in the early 1970s – applied to health care spending, particularly in the hospital and mental health sectors, particularly expenditures on patients least capable of defending themselves. The meat axe sliced away necessary medical expenditures as well as unnecessary expenditures.

Why don’t Klein and Cutler base their evaluations of managed care on the scientific literature that examines it? That literature shows managed care damaged quality of care. If they really don’t have time to do the necessary research, perhaps Klein and Cutler could steal a few seconds to take a look at this clip from “Sicko” in which a woman recounts how Kaiser Permanente (the prototype of the American managed care insurance company) delayed the treatment of her daughter until the little girl collapsed and died. If they still have some time left over to do further research, Klein and Cutler might take in this “Sicko” clip in which John Ehrlichman sells HMOs to Richard Nixon with the argument that “all the incentives are toward less medical care, because the less care they give them the more money they make.”

Managed care began in the early 1970s and is still with us

“Managed care” is a term that was first used in about 1985 to refer collectively to three tools pioneered by HMOs like Kaiser Permanente: financial incentives to induce doctors to order fewer services, “utilization review” (which means an insurance company bureaucrat second-guesses decisions made by doctors and patients), and limited choice of doctor and hospital. By the late 1980s the managed care armamentarium included a fourth tool: The threat to refuse to contract with uncooperative doctors, a threat which in the highly consolidated insurance industry could amount to blackballing a doctor from an entire metropolitan area or state.

Following the enactment of the HMO Act of 1973 (endorsed by Nixon as well as leading Democrats), managed care spread slowly throughout the insurance industry over the next decade, and then much more rapidly beginning in the mid-1980s. Managed care was so widespread by 1988 that a paper published in that year in the Journal of Health Politics, Policy and Law concluded, “It is estimated that virtually all third-party payers conduct or sponsor some type of utilization review.” (Danny Ermann, “Hospital utilization review: Past experience, future directions,” 1988;13:683-704). In a report entitled, Effects of Managed Care: An Update, the Congressional Budget Office reported, “In 1990, only 5 percent of people with employment-based health insurance were in unmanaged fee-for-service plans” (see page 9).

In short, the managed-care cancer began spreading in the early 1970s, and had taken over the entire American health insurance industry by 1990. It never “kicked in,” and it most definitely did not “kick in” in 1995.

Nor did managed care get switched off in 2000 as Klein asserts. It is true that in the late 1990s the insurance industry attempted to defuse the “HMO backlash” (which began in the latter half of 1995 and was in full bloom by 1996) by expanding the “networks” of providers patients could choose from, and by initiating a marketing campaign a few years later designed to persuade the public that the industry would forevermore engage in a kinder and gentler form of managed care. Because measuring the extent to which insurance companies use managed care tools is impossible to do accurately, it is difficult to say to what extent the industry actually changed its ways. It does appear that during the late 1990s and early 2000s the industry made less use of utilization review, the most visible and infuriating managed care tool, and relied more heavily on the less visible tool – financial incentives to deny medical services, including bonuses and penalties based on how well providers perform on crude “report cards.”

Managed care did not cause the 1991-1996 inflation lull

Between 1991 and 1996, annual inflation in health insurance premiums dropped precipitously, from 10.9 percent to 0.5 percent, before soaring back to the more usual annual rise of 5 to 10 percent. A large part of this drop was due to a historic 50-percent drop in the underlying (or economy-wide) inflation rate that began in 1991. But the reduction in health insurance premium inflation exceeded the reduction in underlying inflation. What caused this reduction?

The insurance industry and their allies claimed, precisely as Klein and Cutler do now, that the widespread use of managed care tools should get the credit. But those who made this claim could not cite any research showing that managed care in general, or any one of its tools in particular, saved money; they could only point to the rapid takeover of our health care system by managed care during the 1980s, and then the sudden decline in premium inflation beginning in 1991. What the research did show was that insurance companies that adopted managed care tactics tended to cut medical expenditures and drive up administrative costs, for a net effect of approximately no change in total costs.

So if managed care wasn’t the cause of the early 1990s inflation lull, what was? In a paper published in Health Affairs in 2000, I reviewed the evidence indicating managed care saved no money, and then listed four factors having nothing to do with managed care that explained the lull (“On the ‘efficiency’ of managed care plans,” Health Affairs 2000;19(4):139-148):

The mid-1990s lull was caused primarily by the short-term reactions of the industry to the near-simultaneous occurrence of four events: (1) a downturn in the three-years-up, three years-down health insurance pricing cycle; (2) the delayed effect of the 1990–1991 recession; (3) the endorsement of managed competition models of health reform by the White House and numerous state and federal politicians; and (4) the merger fever triggered by these political endorsements. The latter three phenomena deepened and lengthened what otherwise would have been a shallower and shorter downturn in the usual insurance-pricing cycle. (Page 144)

All four of these factors, as well as the decline in the underlying inflation rate, ceased to have a downward effect on premium inflation at about the same time – about 1996. Accordingly, premium inflation began to rise in 1997, just as the “HMO backlash” materialized. Just as some less-than-astute observers thought managed care should get the credit for the decline in insurance inflation rates that began in 1991, so some observers thought the “HMO backlash” should get the blame for the return of higher premium inflation rates in 1997. Those observers were wrong on both counts.

Post-train-wreck debate

The 2009 debate about the Democrats’ proposed health-insurance-industry bailout is nearly over. It has been clear since June 2009, when the Democrats in both houses of Congress unveiled their versions of the health insurance industry bailout legislation, that whatever Congress passes in 2009 or 2010 will do nothing to cut health care costs and, therefore, will at best leave perhaps half of the uninsured twisting in the wind for who knows how long. Because the Democrats’ proposed legislation does nothing to “bend the cost curve,” to use Beltway jargon, cost containment will dominate the next stage of America’s endless health care reform debate. Unlike the “public option” and managed care, single payer reform would cut costs by hundreds of billions of dollars and would cover everyone.

Klein’s endorsement of Cutler’s fantasies about managed care is one of many signs that a “new and improved” version of managed care will supplant the “public option” as the focus of the cost-containment debate among the “yes but” Democrats and as the “yes buts’” next excuse for not supporting single-payer. We can look forward to this because the “public option” proved so unpopular with the insurance industry and the right wing, and because the insurance industry loves managed care. We should expect this shift to occur in 2010. Unfortunately, we should also expect the “yes buts” to flog Managed Care 2.0 with the same sloppiness and disregard for empirical evidence that they displayed in their campaign for the “public option.”

Kip Sullivan serves on the steering committee of the Minnesota chapter of Physicians for a National Health Program.