Does Managed Care Need to Be Replaced? Presentation to the Graduate School of Management, University of California, Irvine, October 2, 2001

Paul M. Ellwood, Jr., MD



A month ago, George Lundberg, the famous former editor of JAMA and now editor of, sent me a copy of his insightful and provocative book Severed Trust (Basic Books, 2001). The salutation read: "To Paul Ellwood, who needs to help us figure out what to do now that managed care is over." If managed care means organizations that combine health insurance and healthcare competing on price and quality to serve informed consumers with the primary goal of enhancing health, managed care is over in most of the country. In fact, it barely got started. What concerns me more than the fate of managed care is the continuing unacceptable trajectory of the American healthcare system. I've been embarrassed and chastened by the political and economic expedients we accepted and the miscalculations we made at the outset of the HMO strategy. But maybe I've learned something in 35 years as a private citizen trying to understand and shape American health policy. Thank you, UCI Graduate School of Management, for giving me another opportunity after a 10-year hiatus to try to explain where we've been and where I think we should go in healthcare.

Don't think of American health policy as grand reforms like Medicare or those envisioned by the Jackson Hole Group and the Clintons: health policy is an ongoing social experiment, a trial-and-error process conducted in a constantly changing scientific, political, economic, and increasingly ethical context. President Bush's decision on stem cell research was driven by ethical considerations along with science. The care system itself is remarkably stable and resilient, as the push-back against HMOs demonstrates. The power points are doctors, money handlers, and technology, not patients nor Presidents.

Presidents don't care much about health policy. I've collaborated in varying degrees with every White House staff since Lyndon Johnson and have never met a president. Undoubtedly, President Clinton's experiences will serve as a warning to future presidents. The unpredicted and oft-repudiated course of HMOs will be used further to justify a piecemeal approach, but we need radical and comprehensive reforms, not minor ones.

InterStudy, the health policy group with which I'm associated, made its public policy debut in 1966 when it convinced the governor of Minnesota to create a commission on health reform based on comprehensive health planning. There followed an invitation from Surgeon General Stewart to help implement and evaluate comprehensive health planning in all 50 states. After observing the health planning process, we concluded that it wouldn't work. It didn't. In 1969, Assistant Secretary for Health Philip Lee asked us to devise plans for a National Center for Health Services Research and Development, which has since been renamed the Agency for Healthcare Research and Quality (AHRQ). We recommended the goal of this organization should be to apply the best medical knowledge and experience to health policy and medical practice. AHRQ struggled for a while, but John Eisenberg has demonstrated how effective it can be. AHRQ deserves more financial support, recognition, and less political meddling.

Then, in 1970, our opinions were by chance sought by Lewis Butler and Jack Veneman, members of the Nixon Administration, whose responsibility was to do something about medical inflation, which was running at about twice the rate of the rest of the economy. Not long after our first meeting, Butler and Veneman convinced the Nixon White House to adopt the HMO approach.

In 1973, the legislative act that enabled and stimulated the creation of HMOs was passed. While it took 3 years, it was relatively easy to get the HMO law through Congress. The hard part was getting HMOs started and persuading purchasers to use them. The creative part of reforming the health system is marketing, not visions of the future.

It wasn't until the early 1990s that HMOs as a healthcare delivery model became widespread enough to have any meaningful impact on medical inflation. While individual HMOs like the Kaiser Permanente Health Plan had demonstrated major cost savings long before that time, only in 1993 did the rate of increase in US health expenditures fall to the point where it matched the growth rate of the consumer price index.

During the period from 1993 to 2000, the proportion of gross domestic product consumed by healthcare remained fairly stable. More than $1 trillion less was spent on healthcare between 1993 and 2000 than had been projected by the Office of Management and Budget in 1993. The HMO idea's impact stemmed from its simplicity and its attack on what everybody agreed was a terrible problem: out of control healthcare costs.

Medical inflation has returned, and the health system is adrift as too many of the economically driven managed care arrangements have lost their credibility with the public and with medicine as stewards of medical care. Unfortunately, the next phase of reform will be far more complex and problematic to implement and does not naturally follow from the current direction of managed care.

In trying to prepare recommendations for what to do next, I've brooded over what went wrong. The policy makers and purchasers only understood and embraced the inflation fighting price competition idea. My own most compelling interest as a physician was in the integration of healthcare, quality accountability, and consumer choices based on quality first and, secondarily, price. I could only sell HMOs as an inflation buster. Outcome accountability and reporting should be required of the next generation of health organizations, although we've learned from cardiac surgery reporting in New York and elsewhere that organizational accountability has too little influence on consumer choices and market share, but does affect the behavior of doctors and hospitals. Patients believe that quality of care is primarily attributable to their own doctors' skill and empathy. The information consumers respond to is not organizational performance, but the more elusive to measure competence of their doctor. We allowed price competition to exert too much influence on the health system and quality accountability to exert too little.

Our assumptions about structural changes in the health delivery system that would be precipitated by HMOs were also off the mark. As a Minnesota doctor, I admired the effectiveness and quality of multispecialty group practices like Mayo. I fully expected the HMO policies to favor the superior control of resources and the quality inherent to excellent multispecialty group practices. We anticipated multispecialty group practices like academic medical centers -- Palo Alto Clinic and the Kaiser Permanente Medical Group -- would become the predominant form of medical practice with a consequent rationalizing effect on the health sector. Kaiser has done well, especially in California, and Mayo has tripled as a fee-for-service group practice. But, in fact, many multispecialty group practices have not been successful -- some have even failed -- attempting to embrace the prepaid HMO model. My contention is that traditional fee-for-service specialty-oriented and productivity-driven multispecialty group practices couldn't cope with the rapid growth power and economic shift to primary care necessitated by the HMO model. The get-rich-quick sell-outs by some groups to physician practice management companies contributed to the problem. As long as we have large discrepancies in earning power among physicians, true multispecialty group practices with merged revenues will continue to be in the minority.

Furthermore, the traditional academic medical center and multispecialty group practice business and governance models were unable to compete with the speed and aggressiveness of some of the entrepreneurial approaches to managed care of their insurance and Wall Street-oriented competitors. Unfortunately, we cannot rely on multispecialty prepaid group practice to be the primary basis for future reform. The still unrealized hope is that advanced information systems can foster virtual group practices.

A word about the Jackson Hole Group/Clinton piece of the past. Because the political, purchaser, and provider leaders lacked the drive and cohesion to follow through on reforming the American health system, I began convening healthcare experts, leaders, and purchasers in Jackson Hole in the early 1970s. The Jackson Hole meetings were informal affairs that brought together diverse individuals who understood and could, acting together, have an impact on healthcare in the country. Our intent was to prompt them to think of healthcare broadly, well beyond the scope of their own responsibilities. We met 4 or 5 times a year for more than 2 decades. The meetings were rarely, if ever, attended by more than 20 people at a time, and, based on the topic (with the exception of Alain Enthoven and Lynn Etheredge), a different cast of characters was present at each meeting.

At first, the Group had very little impact. But, after a decade, their ideas gained more credibility and attracted to participate in the Jackson Hole meetings cabinet members, governors, senators, heads of the largest health organizations in the country, leaders of medical professional organizations, and the benefit managers of big US corporations. Hillary was invited but didn't show up.

The Jackson Hole proposals (which Alain Enthoven dubbed "managed competition") caught the attention of the Clinton campaign as a blueprint for political advantage and major health system change. "Managed competition" expanded on the HMO strategy by correcting some of its shortcomings and proposing to apply the savings generated by "managed competition" to get all Americans covered with health insurance. The proposal strengthened consumer power and choice, created buying groups for individuals and small employers, called for greater quality accountability by managed care organizations, and shifted Medicare and Medicaid beneficiaries to a defined contribution consumer choice approach. It was a very complex interrelated set of ideas that required those most knowledgeable about healthcare and committed to market forces to implement them.

We first learned of the Clinton campaign's interest in these proposals through an economics editor of The New York Times. We never heard from the Clintons. We did notice Bill Clinton's primary campaign speeches were using Jackson Hole's managed competition rhetoric. President-elect Clinton appointed an elite task force to begin considering implementation of managed competition. No one from the Jackson Hole Group was invited to participate. In fact, almost everyone on the small initial task force and the later huge task force was opposed or unfamiliar with the managed competition concepts. It soon became clear that Mrs. Clinton and her colleagues were in favor of more -- not less -- government involvement in healthcare. It sounded to me like defunct comprehensive health planning revisited. The huge White House Task Force mistakenly excluded active participants in healthcare, assuming these individuals would have a conflict of interest.

To rectify this situation, I wrote a letter to President Clinton, signed by a "who's who" of American medicine, asking to meet with him. The letter urged him to accept the Jackson Hole version of managed competition, and promised him that he could expect the support of the leaders of medicine and corporate America if he did. I got back a form postcard saying the President always appreciates patriotic Americans who care enough to give him advice. Eventually, we had 2 nonproductive short meetings with Mrs. Clinton and some of her advisors. I never met the President. We shifted to collaborating actively with moderate members of Congress (eg, Chaffee, Breaux, Kerrey, Lieberman, Durenberger, J. Cooper, W. Thomas, N. Johnson), resulting in a version of managed competition that could have passed and would have by now assured universal coverage, but the White House was in no mood to compromise. The managed competition episode in many ways represented the high and low point of my health policy career. Much has been made of the partisan political consequences of the Clintons' healthcare debacles, which included managed competition, the sabotaged Medicare Reform Commission, and the festering Patients' Bill of Rights. Nothing has been said or written of the damaging impact it had on the idealism of healthcare leaders who participated in the Jackson Hole process. Five health insurance company CEO attendees no longer have their jobs as their firms moved away from a health maintenance commitment and reverted to more traditional health insurance. Perhaps more serious, it demonstrated to managed care firms and insurers that Harry and Louise ads could beat the President of the United States. I'm ready to try again, but it has taken 7 years to get there. While we've learned a great deal about the realities and politics of healthcare reform, it will be much more difficult this time.

What can we do to put healthcare on a different course? Like George Lundberg, I've written off most managed care firms. Some will see profit and survival through sophisticated risk selection; let's try to run them out of business. Others will consciously try to guide their beneficiaries to a new kind of health organization we must work to create. I'm in the exploratory, creative phases of a potential clinical and business model, but any health reform strategy is going to be far more complex than the HMO approach, which left too much to chance. There are no big buttons triggering a cascade of desirable events as envisioned in the HMO strategy.

You know of my propensity to coin acronyms like HMO and PPO. The new one is "HEROIC." If you can put together a health plan that includes this complex scheme, you will be a HERO. I've begun the typical Jackson Hole process of testing the HEROIC components with those who have already applied some of them. This is a work in progress: we need your reactions pro and con.

The "H" in HEROIC stands for health system. I'd like to retain from the HMO model combining insurance with healthcare delivery, but the emphasis should be on the health component rather than financial incentives. I suspect most fledgling HEROIC plans will enroll through existing insurers or managed care organizations. If we were conducting a Jackson Hole Group meeting, I would ask if the for-profit model had subverted the objectives of health organizations to the point we need to insist the new model be not-for-profit firms. I find it disgusting when CEOs of leading managed care organizations brag to Wall Street analysts that they have succeeded in raising premiums while lowering benefits. Should providers and especially patients/consumers play a more substantial role in the governance of these new organizations? If the HEROIC plans are given any legislated advantage such as malpractice protection if practice guidelines are followed, a flexible SEC or Federal Reserve-like quasi-government agency should regulate and accredit them. The HMO Act has been legislated into paralysis.

"E" stands for evidence-based medicine. The participants in any new kind of healthcare organization -- physicians, patients, and others -- must agree to follow the principles of evidence-based medicine wherever they apply. Consumers must agree that evidence-based diagnostic and treatment options are sufficient and will accept them as appropriate. Some of the most ethical and best HMOs report "relaxed rigor" in adhering to evidence-based protocols as a result of ill-advised patient pressure on physicians. Physicians must agree that they will pursue evidence-based protocols whenever their patients have the corresponding diagnosis. Do the evidence-based protocols apply to enough conditions and are they cost-effective enough in their approach to blunt medical inflation? If they do, we can avoid the conflicts of interest inherent in fee-for-service or capitation.

"R" is for responsibility. Patients need to assume greater responsibility for their own health and for the cost of the healthcare that they require. One practical approach to conferring responsibility is for employers or the government to allocate to consumers a fixed sum of money for use in purchasing health coverage from a selection of health plan options. The argument goes that if consumers are prone to make excessive demands on the healthcare system, they can choose to pay for it out of their own pockets. At the same time, patients must be given more power. To understand their responsibilities and implications of their decisions, consumers need reliable personalized health and risk information. The Foundation for Accountability under David Lansky has made substantial progress on methods for empowering consumers. Providers have the responsibility to determine if referral consultants are capable of acting in their patient's best interest before and after the referrals.

"O" stands for outcomes accountability. Outcomes accountability is absolutely necessary to ensure high quality care. Both the patient and the doctor have the right to know whether or not the treatments they are getting and using are actually working.

Mandated adoption of mistake-prevention measures as advocated by the Institute of Medicine apply as well.

"I" is for information technology. Healthcare is lagging behind other industries in the application of information technology. Information technology used in medicine is demanding, complex, and costly and can interfere with "clinical productivity." IT needs a boost. No modern healthcare system can do without it. Can information technology provide the glue that holds HEROIC health systems together?

Finally, "C" represents commitment. Soon, given recent advances in genomics, we are going to be able to identify in infancy those individuals who are likely to acquire certain diseases -- cancer, asthma, diabetes, you name it -- later in life. Accordingly, we need an approach to healthcare that enables patients and the health system to maintain unprecedented long-term relationships. Most doctor/patient and even health system relationships cannot be maintained over 50 or 60 years. A basic objective of the new health system should be a lifetime tracking and alerting system that allows patients to gauge their preventive care and be notified of clinical progress that applies to them. Continuous commitment requires continuous health insurance coverage for all. We want to work with groups whose objective is health insurance for everyone.

HEROIC is one set of elements that could form the framework for a new healthcare system. I propose to tool up the Jackson Hole Group and enlist other forums and to rely on networking methods seeking a consensus on the components of the next generation of healthcare. But as one health leader said to me, we could sit down and in an hour design a vastly better, dynamic patient-oriented health system: the problem is getting there. My conviction and that of others who have participated in the Jackson Hole Group process is that we should move away from a top-down elite and expert-dominated process except to initially extrapolate potential key components of an HEROIC health system. After composing a promising narrative, we could attempt a flatter, vastly broader and interactive approach to implementation. For an undertaking of such complexity, a networking or maybe, more appropriately, a "netwarring" attack on the dysfunctional aspects of the American way to health, while trying to replace it with a better future.

Along with the War on Terrorism, the President is focusing on reviving the economy. The politicians, the purchasers, and the increasing numbers of uninsured or underinsured public will demand that healthcare costs again be controlled. As we accept that challenge, let's not make the managed care mistake of putting cost containment ahead of a health system that produces health. Our sole motivation for remaking the American health system should not be the faltering economy.

I prepared these remarks after America was attacked and responded so heroically. We need to build an HEROIC American Health System that fills us with pride and matches our patriotism. Commenting on the terrorist attacks, Stephen E. Ambrose wrote in the October 1 Wall Street Journal, "The pride we experience in being Americans has come about not through hubris, or conquest or achievements in space or communications or medicine, but because we are who we are." The American Health System should be a reflection of who we are. But taken as a whole, our health enterprise weakens rather than strengthens who we are as health workers. Our massive health system, like much of American society, had become before September 11 rich, cynical, divided, and disrespectful of those we serve. Twenty years ago my Dad, a family doctor in his 80s working in a neighborhood health center in Oakland's ghetto, said to me, "Son, I'm ashamed of our profession." I hope that each one of us can feel proud instead of ashamed of our calling. We must all help to build an American Health System that proudly hails who we are.