Market Failures and the Evolution of State Regulation of Managed Care

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States have enacted numerous statutes in response to widespread dissatisfaction with managed care, which was exacerbated by its growth during the 1990s. Known as managed care patient care laws, the statutes address concerns of consumers and medical care providers. Organized medicine, a very effective political force, harnessed consumer dissatisfaction.¹ Accordingly, the first wave of laws, prior to the mid-1990s, was primarily the result of lobbying by physicians and focused on "any-willing-provider" laws and laws requiring the inclusion of certain types of providers (such as dermatologists, chiropractors, and acupuncturists) in managed care networks.² Starting in 1995 and 1996, states began to enact laws to address consumer concerns.³

Hundreds of managed care laws have been enacted. Statutory changes were made to existing laws designed to address insurer insolvency⁴ and quality of care.⁵ The laws include (in various combinations):⁶ (1) liability and appeal provisions -- the right to an external review of coverage denials and the right to bring a tort suit against a health plan; (2) provisions affecting choice of and access to providers, such as "any-willing-provider" laws, point-of-service options, and direct access to specialists; (3) protecting providers from undue influence, such as by limiting physician incentives, banning "gag clauses," and giving providers due process rights when they are terminated from a plan; and (4) provisions governing general coverage standards (medical necessity and emergency care) and specific coverage mandates, such as minimum maternity stays.

Sources of dissatisfaction with managed care are well-documented.⁷ Although most consumers are satisfied with their actual experiences with managed care plans, and the observable quality of care remains high,⁸ the public has a generalized concern that managed care plans will lower quality of care, in part by restricting access to beneficial care in an effort to save money for the plan.⁹ Such restrictions are thought to take a variety of forms, including restrictions on access to emergency room care, to specialists, and to other costly care that may potentially be beneficial to the plan enrollee. To the extent that real savings are generated, many consumers and physicians believe that such savings accrue to equity holders of the plans' corporate sponsors rather than to reduced premiums for customers.¹⁰ Patients' reactions to managed care strategies, such as gatekeeping, preauthorization of referrals, and financial incentives for physicians depend in part on whether they are construed to improve quality of care (considered to be good) or to lower cost (considered to be bad).¹¹ Physicians complain that they face constraints on care decisions imposed by plans.¹² As with consumers, however, the documented reality is not as bad for physicians as is often portrayed.¹³ Providers are also concerned about the discounts that managed care plans are able to negotiate, but the vast majority of statutes address issues of access and quality of care rather than payment.

Defenders of managed care respond to these allegations in three ways: (1) they question the validity of the criticisms of managed care; (2) they observe that some of the allegations pertain to health insurance more generally and not just to managed care; and (3) they question whether the cure is more socially desirable than the alleged market failure itself. ¹⁴

The general parameters of this debate are well-developed in the literature summarized above. What is less understood is the justification for managed care regulation in terms of well-articulated market failures (rather than simply political responses to public and interest group concerns); also needed is an examination of how well legal enactments and enforcement activities respond to market failure theory.¹⁵ Accordingly, this article addresses two issues. First, what is the conceptual basis for managed care patient protection laws? That is, what are the market failures that the laws specifically address or do not address? Is there a basis for concluding that managed care patient protection laws are welfare-enhancing in the sense that the potential failures of public regulation are minor relative to the failures of the managed care market? Second, this article presents results of a fifty-state survey of state managed care protection laws and their enforcement. This article does not assess the effects of such laws, but rather gauges whether the laws as enacted and implemented by the states, and proposed in Congress, have the potential to address the market failures identified in the previous section. Ultimately, this article concludes that, although there are some deficiencies in managed care markets as currently constituted, the patient protection laws overall do not address many of the most important deficiencies. 

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