HMOs and health care spending control: The experiment worked and everyone hated it.

We Succeeded In Controlling Health Care Spending And Everyone Hated It

A blog about business and economics.
Dec. 21 2012 10:35 AM

We Succeeded In Controlling Health Care Spending And Everyone Hated It

Remember the nineties? Remember HMOs? People hated HMOs. And for a little while health care politics stopped being about expansion of insurance coverage and started being about various "patients bill of rights" initiatives designed to throttle HMOs efforts to throttle health care spending. Here (via Tyler Cowen) is some careful-looking research from Maxim Pinkovsky that confirms one's intuition that the HMOs were succeeding in curtailing health care spending and that the regulatory initiative succeeded in reversing that success:

The Impact of Managed Care Backlash on Health Care Costs During the late 1990s, there was a substantial cultural, media and legal backlash against the cost-containment practices of managed care organizations (particularly, HMOs). Most states passed a variety of laws in this period that restricted the cost-cutting measures that managed care firms could use. I exploit panel variation in the passage of these regulations across states and over time to investigate the effects of the managed care backlash, as proxied by this legislation, on health care cost growth. I find that the backlash had a strong effect on health care costs, and can statistically explain much of the rise in health spending as a share of U.S. GDP between 1993 and 2005 (amounting to 1% – 1.5% of GDP). I also investigate the effects of the managed care backlash on intensity of care, hospital salaries and technology adoption. I conclude that managed care was largely successful in keeping health care costs on a sustainable path relative to the size of the economy.

Great paper. Though not for the first time I'll object to the use of the word "costs" to mean "aggregate spending". The backlash was driven by the perception that HMO spending containment policies were extremely costly. Health care isn't some constant thing that has a "cost" that rises or falls. HMOs pushed the spending trajectory to a lower level by turning the thing that you purchased when you purchased health insurance into something different. Something people didn't like.

What's unfortunate is that we don't necessarily have a coherent means at our disposal for engaging in choices along this spectrum. In Canada or the UK, parliament needs to explicitly balance the desirability of more provision of health care services against people's desire for low taxes. In the US, we have very little explicit decision-making around this because the system is so fragmented.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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