Book Review

The Economic Evolution of American Health Care: From Marcus Welby to Managed Care

N Engl J Med 2001; 344:1483-1484May 10, 2001

Article

The Economic Evolution of American Health Care: From Marcus Welby to Managed Care
By David Dranove. 211 pp. Princeton, N.J., Princeton University Press, 2000. $27.95. ISBN: 0-691-06693-8

During India's struggle to gain independence from British rule, a reporter asked Mohandas Gandhi, “What do you think of Western civilization?” Gandhi replied, “I think it would be a very good idea.” In The Economic Evolution of American Health Care, David Dranove acknowledges many of the problems of contemporary managed care but argues that, properly structured, it would be a very good idea. Although Dranove worries about “the possibility that managed care will never fulfill its promise,” because “politicians may legislate [it] out of existence,” he states, “I have no doubt that market forces can enable patients to obtain the highest quality care at low prices, while encouraging providers to be efficient and innovative.”

Writing in a nontechnical style, Dranove tries to “use an economic lens to examine the historical development of managed care.” This is a tall order — certainly in such a slim book — and the results are uneven. There is little new here for those familiar with health policy, and the book may not be an absorbing enough read for a general audience, but it could be helpful to physicians and medical students who want to understand the economist's view of health care, including such important concepts as moral hazard, demand inducement, flat-of-the-curve medicine, and the medical arms race.

The two strongest chapters are those on “merger mania” and on quality. In the former, Dranove presents economic theory and evidence that call into question the value of horizontal mergers (e.g., mergers of health maintenance organizations [HMOs]) and vertical integration (e.g., the purchase of physicians' practices by hospitals). Dranove recognizes the possibility that “many of the current mergers are thinly veiled efforts to gain market power” and that “if current trends continue, the health care economy may be dominated by firms that succeed through the abuse of power rather than through value creation.” He believes that antitrust law can prevent this outcome but focuses more on potential antitrust violations by physicians and by hospitals than on such violations by health plans.

Although he acknowledges that managed care to date has mostly involved the management of cost, Dranove argues that by creating incentives for achieving continuous quality improvement and for reengineering the processes by which medical care is delivered, managed care can simultaneously contain costs and improve quality. He provides a reasonably thorough discussion of difficulties in measuring quality and in providing data on quality that patients will actually use, and he makes the interesting argument that imperfect measurements of quality, although unfair to some providers, nevertheless are better for patients and for quality improvement in general than no measurements of quality at all.

The Economic Evolution of American Health Care combines an admirable degree of balance, candor, and realism with unsupported optimism and rather egregious economic functionalism. For example, after reviewing the literature on strategies used by HMOs to contain costs, Dranove carefully concludes that “selective contracting leads to lower prices, the evidence on incentives is weaker, and the evidence on UR [utilization review] is virtually nonexistent.” Yet the book also contains such extremely optimistic statements as this one: “More and more providers are using electronic medical records, so the technology for linking medical records to outcomes should not be an obstacle to performing meaningful outcomes research.” Dranove acknowledges that “managed care has utterly failed to win the trust of American patients” and that there is a widespread dislike of managed-care organizations, yet he claims that “managed care has clearly won the market test,” because most patients are enrolled in managed-care organizations, and “markets provide what consumers demand. . . . Providers and insurers have gotten the message that consumers demand cost containment.” This claim, based on what Dranove dubs the “survivor principle,” represents the pure form of economic functionalism, which assumes that whatever is, is right.

The book is occasionally marred by insufficient citations and by the fact that Dranove, a professor at Northwestern University's Kellogg Graduate School of Management, knows the hospital industry well but, like many health services researchers, is obviously less familiar with physicians and with the on-the-ground organization of health care. He incorrectly states, for example, that physicians spend four to six years in residency training, that physician-owned ambulatory-surgery centers have higher costs than hospital-owned centers, and that physician–hospital organizations routinely deduct the cost associated with each referral to a specialist from the incomes of their primary care physicians.

Dranove concludes with general recommendations — for example, physicians should acknowledge that quality varies and work to improve quality measurements — and with a warning to physicians that if managed care does not succeed, they may find themselves dealing with a single-payer, government-run system. But perhaps in an attempt to keep the book short and simple, he gives only the briefest arguments for why he prefers managed care to a single-payer system and does not address the difficult, albeit relatively technical, questions about risk adjustment, the role of purchasing coalitions, risk contracting, and the incentives required to create a business case for investing in quality. Practical answers to these questions would be necessary if managed care were to become more than a good idea.

Lawrence P. Casalino, M.D., Ph.D.
University of Chicago, Chicago, IL 60637