MotherJones MJ93: The big idea

Managed competition moved to the top of the president’s health-care agenda despite broad popular support for a single-payer system. What is it, who’s pushing it, and why?

Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.

A parable: A foundation offers an inventor a grant to build a better mousetrap. But in the fine print of the contract the inventor reads that the final mechanism must incorporate an old-fashioned player piano. So he designs a mousetrap that includes the piano. Of course, the result is bulky and expensive, and it catches few mice.

So goes President Clinton’s health-care reform plan.

Imagine that the president of the United States asks you to design a new, national health-care system. Anything goes, he says, except for one thing: you have to include a couple of dozen huge insurance companies in the ultimate proposal.

These insurance companies are the player piano in President Clinton’s health-care reform plan.

It’s strange that the new administration’s proposal, which goes by the name “managed competition,” would install insurance companies at the center of America’s health-care system, since the industry’s record on health-care coverage is not impressive. More than thirty-five million Americans are uninsured and sixty million more are underinsured. Tens of millions are frozen into their jobs in order to retain existing benefits, and many cancer survivors, diabetics, AIDS patients, and others are classified as “uninsurable.” Unionized retirees are finding their health benefits unilaterally canceled. And most people are struggling to meet the rising cost of deductibles and co-payments.

One solution to America’s crisis is to follow the Canadian example: eliminate the private insurance industry as middleman and create a national health-insurance system funded by the government.

But President Clinton has rejected the Canadian solution. The first mission of the President’s Task Force on Health Care Reform, according to a confidential memo by top White House official Ira Magaziner, is “defining the structure for the new American health-care system proposed in the campaign–managed competition within a budget.”

According to proponents of managed competition, the system will work like this:

The federal government will define a basic package of health benefits. Large, regional, managed-care corporations, modeled on health maintenance organizations but bigger than most, will then “compete” to offer health-care coverage based on the benefits package. In each state and region, a “Health Insurance Purchasing Cooperative,” or HIPC, will centralize insurance purchasing on behalf of employers and individuals, including the uninsured and those currently covered by Medicaid.

The super-HMOs, called Accountable Health Partnerships, will “replace traditional fee-for-service fragmented practice,” according to the architects of managed competition. The current system, in which a patient chooses his or her doctor and hospital freely, will come to an end. After an initial phase-in period, virtually everyone will be forced to enroll in one of the new super-HMOs.

These super-HMOs will generally be run by large insurance companies, which will assemble coalitions of hospitals, doctors, and laboratories. In most regions, there will be a range of plans, varying from the “Cadillac”–made up of the area’s best hospitals and doctors gathered into one HMO–down to the “Yugo,” which will include the area’s poorest hospitals and least experienced doctors.

The cost of the cheapest health plan (the “Yugo”) in a given region will set the limit above which employers and employees will face steep financial penalties if they opt for better health coverage. This means that most workers, even middle-class ones, will find it very expensive, even prohibitively so, to enroll in a first-class health- care plan. The result will be a multi-tiered health-care system, based on ability to pay.

Furthermore, the only way such a system can cut costs is by cutting back on the amount of health services delivered. Managed competition is based on the theory that America suffers from an overconsumption of health care. Because insurance covers doctor visits and procedures along with hospital stays, the theorists reason, consumers are not cost-conscious. So, to reduce health-care spending, the system is designed to impose direct costs onto consumers–in the form of higher taxes for better health-care plans, along with higher deductibles and co-payments. Unfortunately, raising costs to consumers deters necessary and unnecessary care in equal measure. Facing higher costs, many patients will be unwilling or unable to seek care.

And despite what supporters of managed competition claim, Americans do not go to the doctor too often. In most countries (including Canada) where patients face low out-of-pocket costs, they register more frequent doctor visits and hospital stays–yet spending is much less. What drives the cost of American health care upward are legions of unnecessary tests, diagnostic procedures, and operations, especially on the high-tech end. Consumers do not choose to undergo such procedures; doctors recommend that they do so. To limit waste and unnecessary procedures, the government should establish a watchdog agency to monitor the providers and set a global budget–a limit on total public and private health-care expenditures–to cap spending.

While the Clinton task force is toying with some form of a global budget, their managed competition plan will not in itself reduce spending. So, in an effort to restrain costs, the Clinton plan will probably involve direct price controls on an interim basis, likely including caps on insurance premium increases. But the Congressional Budget Office says that such price controls will be “painful” and will “require consumers to accept some real limits on the quality or quantity of health care.”

There is more to the theory of managed competition–but so far it is only a theory. It has never been tried anywhere. Yet official Washington seems ready to risk a $840 billion industry on the hope that it will work.

The people who designed managed competition did so with the explicit, stated intention of preventing national health insurance.

The plan’s immediate origins date to the mid-1970s and the “Jackson Hole group,” an informal think tank that operated out of the Wyoming home of Dr. Paul Ellwood, a neurologist. Ellwood ran a salon whose participants included Alain Enthoven, a systems analyst generally recognized as the father of managed competition, Lynn Etheredge, a former official of President Reagan’s Office of Management and Budget, and representatives from four of the Big Five insurance companies: Prudential, Metropolitan Life, AEtna Life & Casualty, and the Cigna Corporation. The president of the Health Insurance Association of America, the head of the Washington Business Group on Health, executives from large managed-care corporations like U.S. Health Care and Kaiser, and representatives of the American Hospital Association and the Pharmaceutical Manufacturers Association also contributed to the discussion.

According to a 1992 Health Economics article written by Enthoven, Ellwood, and Etheredge, no labor, consumer, or senior groups were included in the Jackson Hole group’s deliberations.

The article, which summarized the managed competition theory, minced no words about the authors’ intent to rescue the beleaguered insurance industry: “Hyperinflation in U.S. health services without commensurate increases in value is leading critics to demand increasing public intervention . . . and elimination of a multiple-payer, private insurance industry.” Without a national commitment to managed competition, they predicted, “the government will be forced to take over health-care financing. . . . At issue is whether this transition [to managed competition] can be achieved quickly enough, and whether it will be sufficient to forestall massive public intervention into the U.S. health-care system.”

The “massive public intervention” feared by the Jackson Hole group is a code phrase for what is also known as the “Canadian solution.” Since 1971 Canada has had a system under which every citizen is provided full health-care coverage, funded by the federal and provincial governments. Whether Canadians are working or unemployed, and regardless of income, they may seek medical care from the doctor or hospital of their choice. There are no deductibles or co-payments–a Canadian almost never sees a bill from a hospital or doctor.

In the United States, twenty-two cents of every health-care dollar are spent on administrative costs, overhead, and insurance company profits; in Canada, that figure is ten cents. That twelve-cent difference could mean more than $90 billion in savings for the United States, enough to provide coverage for all uninsured Americans and tens of millions who are underinsured.

To ensure Clinton’s opposition to a “single-payer” plan, the insurance industry has led an all-out assault on the Canadian system, spreading exaggerated stories about waiting lines, lack of technology, and the like. Many of these stories have found their way into the media and been recycled by politicians opposed to Canadian-style health care. The articles have overlooked the fact that in Canada people live longer, they have a lower rate of infant mortality, and no one is uninsured. Polls consistently show that Canadians are much more satisfied with their health-care system than Americans are with theirs.

Perhaps the most puzzling aspect of Clinton’s advocacy of managed competition is that pollsters warned him during the campaign that Americans did not favor the idea. According to pollster Celinda Lake, focus groups made up of working Americans found the concept of managed competition to be “laughable.” Lake also discovered that “there is a hard core around 33 percent that supports a version of the Canadian system. And the more you tell people about how it works, the higher the support goes.”

The single-payer model derives its name from the idea that all health-care bills are paid by a single source, which in our case would be the U.S. government. The federal system, administered by the states, would cover all medically necessary services, including doctor and hospital bills, prescription drugs, long-term care, mental-health and substance-abuse treatment, vision and dental care, and preventive care. Since the system would cover all payments, patients wouldn’t have to contend with deductibles and co-payments. And consumers would be free to choose their own doctors and hospitals.

Unlike the British system, under which many doctors work for a government health service, in the proposed U.S. single-payer system (as in Canada) doctors would continue to practice privately on a fee- for-service basis. A single-payer system is not “socialized medicine.”

Enormous savings come, first, because the system eliminates the paperwork and administrative waste associated with fifteen hundred insurance companies, Medicare, Medicaid, and countless self-insured corporate plans; and second, because the single-payer agency exercises tremendous control over the market by negotiating the best rates when dealing with hospitals and doctors.

Can the managed-competition juggernaut be stopped? Perhaps. Most likely Congress will struggle with health-care reform well into 1994, and members of Congress are susceptible to public concern. Dozens of grass-roots coalitions for Canadian-style reform are springing up across the country. Powerful groups like the AFL-CIO and the American Association of Retired Persons, which now lean toward managed competition, could be swayed if Clinton’s plan runs into trouble. And the media–including the radio talk shows–are ready to hear from people and groups who are concerned about managed competition.

The force that could drive America toward adopting a single-payer system is the skyrocketing cost of care. Whether or not a managed- competition system is installed in the next few years, estimates are that costs will continue to rise from $840 billion in 1993 to something like $2 trillion by 2000. The prospect of such staggering numbers should mobilize voters and convince businesses that a federal takeover of health care is the only solution.

Robert Dreyfuss is a Washington, D.C., writer who covers health care, politics, and national security issues.


Straight to the point: Donations have been concerningly slow for our hugely important First $500,000 fundraising campaign. We urgently need your help, and a lot of help, over the next few weeks so we can pay for the one-of-a-kind journalism you get from us.

Learn more in “Less Dreading, More Doing,” where we lay out this wild moment and how we can keep charging hard for you. And please help if you can: $5, $50, or $500—every gift from every person truly matters right now.

payment methods


Straight to the point: Donations have been concerningly slow for our hugely important First $500,000 fundraising campaign. We urgently need your help, and a lot of help, over the next few weeks so we can pay for the one-of-a-kind journalism you get from us.

Learn more in “Less Dreading, More Doing,” where we lay out this wild moment and how we can keep charging hard for you. And please help if you can: $5, $50, or $500—every gift from every person truly matters right now.

payment methods

We Recommend


Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.


Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.