Managed Care Band-Aid Fails To Control Medical Inflation
Subject Comparative Statics
Topic Equilibrium
Key Words Costs, Managed Care, Demand, Payments, Bargaining Power, Negotiations, Price
News Story

A study by the Center for Studying Health System Change has concluded that the health care system is little better at controlling costs than a decade ago, in spite of the touted benefits of managed care. It argues that there is a 'medical arms race' in which doctors, hospitals and insurers are competing to provide the latest treatments, resulting in higher demand but also higher costs.

Costs are also harder to control because lawmakers have enforced minimum requirements, such as 48-hour hospital stays after childbirth. Consumers themselves have also proven resistant to more tightening of rules, such as requirements to obtain referrals before seeing specialists, and payments for services on a percentage basis rather than a flat-rate $10 or $20. Also, through mergers, doctors and hospitals have gained bargaining power in negotiations with insurers.

The result is likely to be that employers will charge employees higher deductibles and co-payments. Insurers may offer more options, and vary the price according to the cost of the doctor or service, much like brand name drugs are often priced higher than generic drugs. Preventive treatment may increase, especially for those at risk for costly and chronic conditions.

(Updated April 1, 2001)

1. The news story cites a number of causes of health care price increases. Draw a supply and demand diagram of the market for health care, and mark the initial equilibrium price and quantity. Then explain and show the effects of:
a) new medical treatments
b) minimum hospital stays
c) resistance to mandatory referrals before seeing specialists
d) higher payments to doctors
2. The news story mentions the goes on to surmise what changes may occur in response. On another diagram of the health care market, explain and show the effect of:
a) higher deductions from employees' pay for health care
b) charging patients more for more costly treatments
c) preventive health care
Source Julie Appleby, "Health costs going out of control," USA Today, March 8, 2001.

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