Feature Article

Managed Care --- A Review

Thomas Dorman, MD

In contemporary America, we are suffering from a lack of concepts, a philosophical vacuum recognized first by Ayn Rand. Nowhere is this more marked than in the fascist take over of the oldest profession. The ethics of physicians have been wardens of Western traditions since the days when Hippocrates formulated his famous Oath. The personal relationship and direct individual responsibility between physician and patient, the laissez faire capitalist system, was encapsulated in the honorable commitment to the patient, long before Ludwig von Mises wrote Human Action.

The relationship between any buyer and purveyor contains what this writer defines as a point of transaction. This concept is introduced to convey the idea of the moment of decision for the exchange. For instance, when I go to the grocery store to buy a loaf of bread, the purchase is transacted at the moment that money changes hands at the check out. There are, of course, a number of steps. First I am hungry, next I look in the pantry and see that the supply of bread is low, then I go to the store. On the shelves various foods are available, cereal, cakes, cookies, and amongst the breads a choice is available. I choose, taking my appetite and disposition into account on the one hand, price and my overall budget on the other. Even after the transaction one might occasionally return merchandise to the store. Nonetheless, the point of transaction is the epitome of the whole process of satisfying my hunger and no one would argue that the focal point is the moment at which funds are transferred to the check out cashier.

The Delegation of Decisions

There are many instances in modern economic life where the point of transaction is delegated. One example might be when the chief executive of a country goes to war. The taxpayer did not choose war when signing the cheque contributing his share to the national exchequer. In republics, one would agree that the point of transaction is the chief executive's declaration of war, not that one would argue about the penumbra of circumstances which might contribute to hostilities. My point is that a decision is made and it is possible, in the case of most decisions, to identify a time or occasion where the process towards action is most concentrated, even in delegated transactions.

Now, one might ask, when purchasing insurance, where is the point of decision? Does it occur at the time premiums are paid, or does it occur when claims are settled? Here the decision to purchase the insurance and the demand against the company, in the case of loss, are made by the consumer. The provider, or purveyor, i.e., the insurance company, might, and often does, have a different motive at the time when claims are made. So it is that in America 17 percent of insurance claims are litigated. One might categorize the problem as one where the point of decision is ill-defined or diffuse. This is not an argument against the institution of insurance, it is merely an observation on one of its inherent weaknesses.

In the case of an injury or sickness the patient who comes to the healer, in the traditional manner, pays for the treatment or remedy. The point of transaction is at the time when the patient accepts treatment. Traditionally payment was made at the same time. One might note parenthetically, that cognitive medical services, diagnoses, are paid for poorly in this system, even though diagnosis remains the physician's main function. Benefit accrues to the patient only with treatment. Nonetheless, the provision of diagnosis and prognosis are informational commodities of value to the customer.

The Nature of Health Insurance

The term health insurance is a misnomer. Asset protection for medical expenditure is the more correct term. One can insure one's health by varying one's food, taking regular exercise, the avoidance of toxins and the prevention of accidents --- this is health insurance. There is an advantage in maintaining the correct use of language. Negligence in this regard is dangerous to logic which depends on concepts (more on this later). Insurance is a sensible thing for a citizen. The pooled, or shared, risk for an unlikely catastrophic event is the essence of insurance. One might insure one's assets against the risk of dissipation for unexpected, unlikely catastrophic disease or injury with attendant medical expenses. "Insurance" for likely events is a contradiction in terms. Expected expenses, and we all have some expenses connected with our health, should be covered from current earnings.

Insurance is, therefore, by its nature a voluntary act, a pooling of risk with like individuals. It is a form (special instance) of deferred gratification (with shared risk). Deferred gratification constitutes the philosophical essence of the Western system of agriculture and industrialization. It is through investments that we harvest produce later, in greater amount. The concept is that of saving the seed-corn in face of hunger. Deferred gratification is a moral characteristic of an individual. In the case of insurance against an unexpected personal disaster, such as illness, which afflicts citizens sporadically, compulsory insurance negates the very concepts of free will and so of individual responsibility. It is proposed here that involuntary insurance is a non-term. A slave or serf, being an asset to his master, his health is serviced, like an animal's, for utilitarian purposes. When the care becomes too expensive the animal is recycled as meat. (Note how all the statist schemes include cost containment.)

How Important is Health Care?

Before discussing the paradox of compulsory competition in managed care it is necessary to remind the reader that health care is not necessary. In the hierarchy of human necessities it is self evident that food and water followed by shelter, clothing, and defense are the first priorities in preserving life. The fountain of all human achievements, by which man is distinguished from beasts, is education, I place education next on the list of necessities. Health care follows. In any case, it is only in the last two hundred years that doctors have furnished patients sizable benefits, and our civilization progressed well before the advent of modern medicine.

It is true that the man in the street, in modern America, has been brainwashed to believe that health care is a necessity and a right. Dramatization of disease and medical achievements, though truly poignant, are not first priorities in the schemes of the affairs of men. We are merely living in a time when they are perceived as such.

The market place in laissez faire (capitalism) ensures the best provision of most services to the majority of customers. It is explicit in the writings of Von Mises and Hayek that the successes are through microeconomics. Each customer makes a decision for himself, what when, how much, and at what price to buy. Each transaction in the market place its mutually beneficial. These interactions in the market place are the engine of production. It is Adam Smith's invisible hand which has brought us the bounty of modern civilization; the highest standard of living for the largest number.

It is free will and individual responsibility, however, which are the philosophical basis for this success. It is also free will and individual responsibility which are the basis for the republic. The American Republic, as established in 1776, is by far the best example in human history. How do these concepts square with compulsory managed competition?

Compulsory (Managed) Competition in Health Care

The circus of political activity in Washington, D.C. has brought us "managed competition." There were dozens of legislative proposals in the early 1990s based on various grievances produced by the system. Since then the treadmill of grievance and remedial legislation has become what I have come to call a treadmill of Sisyphus, one with no end and no rewards, except that it is hell for everyone.

We are told that because medical investigations and operations are expensive, because placing patients in hospitals is exorbitant (this is due mainly to the complexity of management which in turn is due to government regulations), we need a form of rationing. (Rationing is discussed in absentia, the word stalks the legislative halls of bureaucrats and politicians, but is never spoken.) Now rationing is a sensible activity. We all ration our purchases avoiding misallocation of finite funds. The essential question is who makes the determination about the expenditure. In the case of a citizen buying bread, the point of decision is at the check-out. Where is the point of decision when the citizen receives health care? In all the proposals for managed care the decisions will be made at the executive offices of the systems, the HMOs and the like. (Details will still be decided by doctors with their patients, but the allocation decisions will not.) This is an important point which is never addressed directly. The managers are hired for "resource allocation and cost containment," this is what management is about. The competition will be between the care franchises, HMOs, alliances, or whatever they are called. In all the offerings, competition is proposed merely as a sop to the waning capitalist ideal. It is, actually, competition in rationing that they are talking about.

In conventional socialism, there is a unitary National Health Service, a one payer system, whereby a command economy allocates health resources through a hierarchy of needs. With managed care, there are profitable incentives for rationing. Unfortunately, and I hope not intentionally, the incentives are for vicarious control. The doctors are threatened and penalized. This is fascism at work.

In the cost-plus system of health care, we provided more services than the customers might have bought, taking their overall utility consideration into account. Costs escalated. Now we will be providing less, and through a charade of the capitalist system we are proposing to legislate a profit for managers --- little fascist dictators (none of whom have taken the Oath of Hippocrates) --- whose incentive is to provide the least for the fewest at the meanest cost.

The Missing Concept

It is an insult to philosophy that these legislative proposals claim to promote the capitalist system. The missing concept can be phrased in the words: The Point of Decision. The point of decision is at the point of rationing in these managed care schemes, competition amongst whom is based on competition in management, rather than on competition through doctoring.

Wealth from capitalism comes when the point of decision is at the point of utility. In all these schemes, the point of utility (treating patients) is separated in person, in time, and in place from the point of decision (we saw earlier how these are the inherent weaknesses of insurance), but more importantly, they are separated now also through incentive. An ethical doctor's incentive is to treat his patient well. An efficient manager will ensure profits, i.e., cheap treatments.

The Death of Philosophy

The evolving bad health care will be a pity for the sick and their physicians. Corrupting the oldest professions represents a triumph for evil. The sight of physicians scurrying into managed care schemes, with sacrifice of their professionalism, for short term pay is pathetic. It is, however, the loss of philosophical concepts, the loss of the spirit of free will and individual responsibility represented in these schemes, together with conceptual muddleheadedness which are sounding the death knell to the philosophy of our civilization. For instance, the term "managed care" which we hear in all these proposals, by sleight of words states the opposite of what it really is. It is competition in management we should be speaking of.

Many societies have used a command economy for various purposes, we still condone it in war. Personal matters are still often left to the responsibility of individuals. It is the free mind and individual responsibility, the principles of the Renaissance which have brought us the wonders of modern health care through the free market capitalist system and through the inventiveness of the free minds it has raised.

lt seems we are now going to harness the capitalist engine for rationing. We all know that in command economies rationing leads to long queues, shortages, and lousy care. We have accounts of this from Soviet Russia, socialist Britain, and the semi-socialist Canadian health system. It seems, however, that we in America are about to embark on an accelerated venture of harnessing the capitalist engine for the destruction of healing. The huge incomes of the successful managers is a reflection of this evil force.

Let no man, who believes in freedom, or who appreciates Western civilization, allow himself to be seduced into managed care through sleight of language or conceptual muddleheadedness.

In summary, the concept of the point of decision in commercial transactions is introduced to convey the idea that in the purchase of insurance, the point of decision is somewhat remote from the point of utility. In managed health care, the distance is lengthened; additionally, the managers compete through rationing; this counters the purpose of doctoring.


Dr. Dorman is a practicing physician in Kent, Washington. His e-mail address is tdorman@nwlink.com.