Letter to the Editor by Cox on "Clueless in the Land of Managed Care"

Managed Care

March 20, 2006
by Thomas Cox in response to Clueless in the Land of Managed Care,  by Anonymous Physician (January 6, 1997)

Dear Editor:

I write in response to the OJIN topic on Managed Care, addressing the question of whether managed care can ever be salvaged. My response is: Not really.

One can understand why managed care can't be salvaged when one understands the real problem with managed care, prospective payment systems (PPSs), and capitation. I call the impact of such strategies on providers of care, '˜Professional Caregiver Insurance Risk.' Health care providers make extremely poor insurers, and yet that is exactly what they become in a managed care environment. Managed care companies and insurers that transfer insurance risks to health care providers through capitation avoid both the risks and the benefits of insurance operations. Why is this bad? It's because the Central Limit Theorem shows that aggregating risks leads to reduced risk for both individuals and insurers; and the larger the insurer, the greater the risk reduction and the lower the cost of insurance. The risk reduction achieved is inversely related to the size of the insurer's portfolio, i.e., the number of policyholders insured. Small insurers achieve quantifiably lower risk reduction benefits than large insurers, so their operating results are usually either higher or lower than larger insurers, causing financial difficulties and frequently insolvencies.

Health care providers are very small insurers; hence even very efficient health care providers will be very inefficient insurers. This causes an irremediable problem: Insurance risk-assuming health care providers must target service delivery levels below the levels they could provide if they were not acting as inefficient insurers. That lower target level of services compensates for inefficient insurance operations, and this means a quantifiable loss in net service capacity. The cost of entering the insurance business comes out of the ability to provide care to patients; and there is no way whatsoever to correct this fundamental flaw in managed care, capitation, and PPSs. Assuming equally efficient health care provider operations in indemnity (traditional) and capitation-financed systems, the indemnity system is the most efficient insurance operation and will finance the highest level of care at the point of service. We should demand that the designers of managed care systems demonstrate how these systems work mathematically before accepting these systems. We should not accept these systems simply by conjecture and increasingly isolated success stories.

Thomas Cox PhD, RN, CSW, CPCU
Associate Professor
College of Nursing
Department of Supportive Sciences and Health Systems
Seton Hall University
Gainesville, FL
Email: coxthomb@shu.edu