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Journal Issue: Children and Managed Health Care Volume 8 Number 2 Spring 1998

Children and Managed Health Care: Analysis and Recommendations
Lisa W. Deal Patricia H. Shiono Richard E. Behrman


A revolution in health care has taken place during the past decade in the United States. The revolution was ignited by skyrocketing health care costs1 and fueled by the widespread public sentiment that the high cost of health care was the most important problem in the health care industry.2 The health insurance industry and providers responded to the public's outcry by creating lower-cost health care insurance alternatives—managed health care plans. Managed health care is a vast array of financing and health care delivery systems that are designed to limit costs and ration health care. Employers and individuals seized the opportunity to lower their health care costs and began to buy these managed health care plans. Today, managed care plans are pervasive; 85% of all employed families and a growing number of those covered by Medicaid are in managed health care plans.3,4 By choosing managed health care, U.S. employers and consumers have changed the nation's health care system.

The managed health care revolution produced major changes throughout the health care system. The lower health insurance rates that employers and consumers demanded were made possible in part by lower reimbursement rates to health care providers, hospitals, and suppliers. To lessen the impact of these lower reimbursement rates, health care providers and hospitals were quickly reorganized into networks to capitalize on economies of scale. Lower insurance rates also resulted in reductions in the salaries of health care providers and more stringent use of preauthorization procedures to reduce unnecessary care. Plans obtained additional cost savings by negotiating large-volume discounts from health care providers, hospitals, and suppliers; by reducing hospital utilization; and by offering financial incentives for providers to economize. The increase in marketplace competition among plans also has served to bring costs down.

In the early 1990s, it appeared that managed health care was very successful in reducing health care insurance rates. Health insurance costs were kept low, and employers and families continued to buy managed care health plans. The popularity of managed care plans, coupled with the successful use of cost-saving techniques, resulted in huge profits for insurers. Some of these profits were funneled out of the health care system and used for increased administrative management costs and increased salaries and bonuses for health plan executives. To reap the financial benefits of the new managed health care system, many traditionally nonprofit insurers and hospitals quickly transformed themselves into for-profit corporations.