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The Economic Evolution of American Health Care

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

David Dranove
Copyright Date: 2000
Pages: 224
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  • Book Info
    The Economic Evolution of American Health Care
    Book Description:

    The American health care industry has undergone such dizzying transformations since the 1960s that many patients have lost confidence in a system they find too impersonal and ineffectual. Is their distrust justified and can confidence be restored? David Dranove, a leading health care economist, tackles these and other key questions in the first major economic and historical investigation of the field. Focusing on the doctor-patient relationship, he begins with the era of the independently practicing physician--epitomized by Marcus Welby, the beloved father figure/doctor in the 1960s television show of the same name--who disappeared with the growth of managed care. Dranove guides consumers in understanding the rapid developments of the health care industry and offers timely policy recommendations for reforming managed care as well as advice for patients making health care decisions.

    The book covers everything from start-up troubles with the first managed care organizations to attempts at government regulation to the mergers and quality control issues facing MCOs today. It also reflects on how difficult it is for patients to shop for medical care. Up until the 1970s, patients looked to autonomous physicians for recommendations on procedures and hospitals--a process that relied more on the patient's trust of the physician than on facts, and resulted in skyrocketing medical costs. Newly emerging MCOs have tried to solve the shopping problem by tracking the performance of care providers while obtaining discounts for their clients.

    Many observers accuse MCOs of caring more about cost than quality, and argue for government regulation. Dranove, however, believes that market forces can eventually achieve quality care and cost control. But first, MCOs must improve their ways of measuring provider performance, medical records must be made more complete and accessible (a task that need not compromise patient confidentiality), and patients must be willing to seek and act on information about the best care available. Dranove argues that patients can regain confidence in the medical system, and even come to trust MCOs, but they will need to rely on both their individual doctors and their own consumer awareness.

    eISBN: 978-1-4008-2468-7
    Subjects: Health Sciences

Table of Contents

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  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Acknowledgments
    (pp. vii-2)
  4. Introduction
    (pp. 3-4)

    For the past two decades, I have researched the role of market forces in health care. As a graduate student, I was privileged to study under Alain Enthoven, one of the leading architects of the managed care revolution. Since then, I have been on the faculty of two outstanding business schools. I have always been a big believer in the benefits of competition.

    In this book I use an economic lens to examine the historical development of managed care. The starting point for this analysis is the “hopping problem.” Economists have long recognized that it is very difficult for patients...


    • CHAPTER 1 Marcus Welby Medicine
      (pp. 7-27)

      Most baby boomers remember the popular 1960s television show Marcus Welby, M.D. Portrayed by Robert Young, the television doctor was everyone’s favorite primary care physician (PCP). He was wise, kind, and one of the most trusted members of his community.¹ He was also at the center of a medical care system not unlike what patients in the real world experienced.

      In the era of “MarcusWelby medicine,” a patient who fell ill would visit the PCP’s private medical office. If the patient could not travel, the PCP might even make a house call. The PCP would spend as much time as...

    • CHAPTER 2 The Origins of Managed Care
      (pp. 28-44)

      For most of the twentieth century, the traditional U.S. health economy had three defining features:

      1. Patients relied on autonomous physicians to act as their agents.

      2. Patients received complex care from independent, nonprofit hospitals.

      3. Insurers did not intervene in medical decision making and reimbursed physicians, hospitals, and other providers on a fee-forservice basis.

      These features helped patients solve the problems of determining what medical services to buy, where to buy them, and how to assure coordination of care. But there has always been one drawback—the resulting health economy is very expensive. Back in 1960, health care expenditures...

    • CHAPTER 3 The Government Steps In
      (pp. 45-64)

      It is not too far-fetched to describe the pre-1960s U.S. health economy as “laissez-faire.” Of course, there were licensing laws establishing minimum standards of competence for providers. Otherwise, most government programs increased insurance coverage and access to services but did not directly intervene in the market. The absence of direct intervention is somewhat surprising. During the middle third of the century, the prevailing sentiment in the United States was that “big government” could solve most social and economic problems. The federal government heavily regulated airlines, banking, telecommunications, and many other industries, but not health care. Yet most Americans considered (as...

    • CHAPTER 4 Managed Care Takes Over
      (pp. 65-90)

      By the early 1980s, the U.S. health economy was in turmoil. The government planning efforts of the 1970s had failed to curtail cost inflation, and national health expenditures continued to show double-digit annual increases. By 1982, health expenditures had risen to more than 10 percent of the GDP and were forecast to rise steadily. By 1990, health care accounted for 12.6 percent of the GDP, and some analysts predicted that figure would exceed 20 percent by the year 2000. (The current figure is under 14 percent.)

      Although much of the burden of rising costs fell squarely on the firms that...


    • CHAPTER 5 The Business of Health Care
      (pp. 93-114)

      Health care in the United States is a trillion-dollar industry. Even small players in the industry are fairly large by the standards of many other industries. A modest group practice of five physicians can generate revenues of $3 million or more annually (more than the annual revenue of a typical McDonald’s franchise). A community hospital can generate revenues of $100 million (more than the annual revenue of some major-league baseball teams), and some teaching hospitals have revenues exceeding $500 million annually (roughly twice the 1999 net revenue of the Internet auction site eBay). Increasingly, the managers of these large enterprises...

    • CHAPTER 6 Merger Mania
      (pp. 115-135)

      The 1990s were a decade of unprecedented consolidation in the health economy. As recently as 1975, three-fourths of all community hospitals were independent, including the vast majority of nonprofits. Today, most hospitals belong to systems. In some metropolitan areas, virtually all hospitals have found partners. There have been so many hospital mergers that the journal Hospitals changed its name to Hospitals and Health Systems, and the U.S. Federal Trade Commission (FTC) and the Department of Justice (DOJ) were forced to issue antitrust guidelines for hospital mergers. In 1975, most physicians were in solo practice; today fewer than 25 percent remain...

    • CHAPTER 7 Quality
      (pp. 136-158)

      Health care quality is a slippery concept, both subjective and multidimensional. Yet patients, providers, and payers talk about it all the time; if it were not for concerns about quality, there would be no debate about the merits of managed care. To sensibly discuss quality, we need a sensible definition. For the sake of defining quality, consider the following choices: Would a patient with a major illness prefer a dispassionate doctor whose exceptional skills lead to a complete recovery or a warmly sympathetic doctor whose mediocrity leaves the patient a cripple or worse? Would an asymptomatic patient prefer a curt,...

    • CHAPTER 8 Fulfilling the Promise of Managed Care
      (pp. 159-176)

      Throughout the evolution of the health economy, it has remained difficult for patients to efficiently and effectively shop for health care goods and services. The defining features of the health economy—from trust, physician autonomy, and nonprofit hospitals to selective contracting, capitation, and utilization review—are all efforts to solve the shopping problem. It is widely perceived that the managed care solution to the shopping problem emphasizes cost containment at the expense of quality. But with MCO premiums increasing by 6 to 8 percent in each of the last two years, there is growing concern that MCOs may no longer...

  7. Notes
    (pp. 177-192)
  8. Bibliography
    (pp. 193-202)
  9. Index
    (pp. 203-211)