U.S. Healthcare

Managed Care vs. Fee-for-Service

In David Cutler’s book, “You Money or Your Life”, he compares two types of health insurance systems, fee-for-service and managed care. The first, fee-for-service, was the predominant health insurance scheme in place for most of the 20th century. Its main objective was for the insurance companies to pay whatever doctors or hospitals charged for certain services. The doctors were free to determine what particular type of care was needed and how much it would cost to provide those services. Cutler goes on to explain that as a result of practicing such a system, high tech care was more prevalent than less intensive care. Doctors saw this as an opportunity to capitalize on the higher cost of high tech care over the lower cost of less intensive care, therefore increasing their salaries substantially. This system is based more on the intensity of the service rather than the value of it. One positive outcome of practicing this type of healthcare was the incentives it created to develop and advance medical technology to what its current state is today, even though this system effectively gave way to that of managed care.

Managed care gained much of its momentum in the early 90’s during the Clinton administration. Even though there were still traditional plans offered, managed care became more popular because of its lower costs. With the fee-for-service system,

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insurance companies did not take part in care decisions whereas in managed care, insurance companies oversaw every aspect, made decisions on what care should be provided (if actually needed) and restricted access to which doctors would provide that care thus translating into lower costs to the consumer.

Changes in Healthcare Costs Since 1960

Cutler argues that throughout the fee-for-service era, overall costs for healthcare steadily and consistently rose rarely ever leveling out. The main reason for this being as more people became insured, hospitals and doctors charged higher prices for their services since it was only the insurance company paying out the costs. Facing consistently rising benefit costs, employers eventually transferred those costs onto their workers in the form of lower wages. Cutler believes that as a result of this, it led to the fee-for-service system’s demise. In the managed care system routine care is more utilized than is high-tech care, doctors are paid less and medical spending is significantly lower.

As seen in the graph of the