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Managed care for Medicare

It took nearly two decades for Alain Enthoven's proposal of managed competition in health care to be implemented on a relatively large scale. Now Enthoven is proposing a plan to apply many of the principles of managed competition to Medicare. But this go-round, there's little time to spare.

"By the time the 78 million baby boomers start becoming eligible for Medicare benefits in 2010, it will be too late," say Enthoven, the Marriner S. Eccles Professor of Public and Private Management at Stanford Business School, and his associate Sara Singer, MBA '93. "Federal outlays for Medicare are expected to almost double as a percent of the gross domestic product, making Medicare the federal government's single largest expense. If the Congress does nothing now, by 2010 the program will cost so much that the only options will be delayed eligibility for coverage, substantial reductions in benefits for Medicare beneficiaries or higher taxes on working people."

Managed competition has been shown to work in the private sector. In a national study, conducted jointly by Singer and Enthoven with Kelly Hunt, Jon Gabel and Derek Liston of KPMG Peat Marwick, the authors conclude that "employers that design their health benefits programs so as not to subsidize more expensive health plans at the margin experience, on average, lower rates of increase in their health care premiums. Moreover, employees migrate to lower cost plans so that rates of increase in the overall weighted average costs are also lower."

Enthoven and Singer's plan to reform the giant public-sector health provider resembles Enthoven's earlier proposal for the private sector in encouraging beneficiaries to choose health plans that offer the highest value for the money. Enthoven and Singer propose that beneficiaries be given a wide choice of health plans and the information needed to make an educated choice in a coordinated open enrollment period. They propose that Medicare make the same contribution to beneficiaries for all the plans it offers, leaving the recipient responsible for the difference in premiums. In the private sector, this has made beneficiaries more cost-conscious.

"A key part of the strategy we propose is to offer Medicare beneficiaries something attractive to induce them to switch willingly from fee for service to managed care, and also to accept the reform as a matter of public policy," Enthoven and Singer write. Enthoven assumes fee for service will disappear entirely in Medicare because it won't be able to compete, but he sees reason to phase it out slowly. "Within a few years the great majority of employees aging into Medicare will already be in managed care arrangements," they note.

As incentive to switch into managed care, Enthoven and Singer offer a standardized benefit package that includes catastrophic expense protection and prescription drugs, neither of which is offered by fee-for-service Medicare. This plan would also eliminate the need for supplemental insurance.

"While standard benefits may have the superficial appearance of being a 'one size fits all' solution, in reality benefit variations serve to

increase the cost of services for those who need them," they claim, explaining that, for example, a plan that offers hearing aids would attract a disproportionate share of people with hearing problems, tending to increase costs. Enthoven and Singer would also eliminate exclusions for preexisting conditions, enabling beneficiaries to switch plans at predetermined intervals, perhaps annually.

To even the playing field for health care providers, Enthoven and Singer call for inde