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During the era that health-care providers understandably remember as the Golden Age, circa 1965 through 1985, all these factors operated at full force to isolate American medicine from financial reality. Medicare and Medicaid added millions of paying customers, and in the meantime, neither the government nor private insurers put up much resistance to rising prices. By now, though, the private sector has wised up. Almost two-thirds of privately insured Americans are under so-called managed care: 20% in health-maintenance organizations, which provide all or most medical services under one roof, and 44% in preferred-provider organizations, which negotiate prices in advance with certain doctors and hospitals. Although adherents fiercely debate their relative merits, the principle of HMOS and PPOS is the same: controlling costs by having the insurer "manage"--that is, limit--the consumer's choices.
Medicare is rapidly becoming the last bastion of traditional "fee-for-service" insurance, in which you are free to choose any doctor you want and have any treatment he or she recommends. And even Medicare is experimenting with managed care. For more than a decade, enrollees have had the option of joining an HMO, if one is available in their area. Some 9% are currently signed up. Medicare usually pays the HMO a premium equal to 95% of its average per person costs in the area, adjusted for a few factors like age and sex. Nevertheless, Medicare loses money on the deal. Why? The main reason is that these are people who cost the system less than 95% of the average. Healthier people tend to be the ones who sign up with HMOS.
It is too late to argue that it would be unfair to "railroad" Medicare patients into managed care against their will. Most of us are already in managed care, and few of us had any choice about it: our employers put us there. Managed care can be excellent or terrible--it can achieve its savings by efficiency or by skimping on quality--but for almost everybody it is inevitable. The only question is how we get there.
The preferred route of many--including the American Medical Association, the conservative Heritage Foundation, the moderate-liberal Progressive Policy Institute and (according to heavily dropped hints) the Republican congressional leadership--is so-called managed competition. Managed care is a type of health insurance; managed competition is a system for choosing among types of health insurance, including managed care.
In its purest form, managed competition would replace Medicare with a voucher good for the purchase of the health insurance of your choice. The government would lightly supervise the available choices. You could choose an HMO, a PPO, traditional fee-for-service medicine or whatever. If your choice cost more than the value of the voucher, you would pay the difference. If it cost less, you might get a rebate. Competition to sign you up is supposed to restrain prices and guarantee quality. The health-care system for federal employees works roughly like this, and it works well. Last year premiums actually went down.