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Payer-Provider Integration, Credible Commitment,
and Managed Care Backlash.
Abstract: People are more distrustful of managed care organizations (MCOs) than traditional health plans, a phenomenon that has become known as "managed-care backlash." This paper investigates a model of the interaction between insurers, physicians, and patients and identifies two possible motivations for MCO backlash. The first, which traces to traditional health plans' superior ability to credibly commit to providing better than least-cost care through the contracts they sign with independent physicians, is efficiency promoting. The second, which arises when patients are able to obtain higher benefit treatments through reneging on their initial insurance contracts through "doctor shopping," may reduce efficiency.
"Payer-Provider Integration" is a revised and simplified version of the following, older paper.
Market Structure, Commitment, and Treatment Incentives in Health Care
Abstract: People are more distrustful of managed care organizations (MCOs) than traditional health plans, a phenomenon that has become known as "managed-care backlash." In a model of the relationship between a patient, insurer, and physician, this paper shows that when the roles of insurer and provider are combined into a single player (as in a staff-model HMO), the equilibrium insurance plan departs from the social optimum, due to the fact that the HMO cannot credibly commit to providing non-least-cost care. In contrast, when the insurer and provider roles are separate, as in fee-for-service insurance, the equilibrium reimbursements for the physician implement the first-best treatment regime at first-best cost. Thus, the relative inability of MCOs to commit to non-least-cost care may account for at least part of managed-care backlash.