The History and Principles of Managed Competition

Managed competition in health care is an idea that has evolved over two decades of research and refinement. It is defined as a purchasing strategy to obtain maximum value for consumers and employers, using rules for competition derived from microeconomic principles. A sponsor (either an employer, a governmental entity, or a purchasing cooperative), acting on behalf of a large group of subscribers, structures and adjusts the market to overcome attempts by insurers to avoid price competition. The sponsor establishes rules of equity, selects participating plans, manages the enrollment process, creates price-elastic demand, and manages risk selection. Managed competition is based on comprehensive care organizations that integrate financing and delivery. Prospects for its success are based on the success and potential of a number of high-quality, cost-effective, organized systems of care already in existence, especially prepaid group practices. As it is outlined here, managed competition as a means to reform the U.S. health care system is compatible with Americans’ preferences for pluralism, individual choice and responsibility, and universal coverage.