Market Failures and the Evolution of State Regulation of Managed Care

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In response to widespread dissatisfaction with managed care, states have enacted numerous statutes, known as managed care patient protection laws, that address concerns of consumers and medical care providers. These laws include (in various combinations): (1) liability and external review provisions, (2) increasing choice of and access to providers, (3) protecting providers from undue influence, and (4) setting general coverage standards and specific coverage mandates. These laws are now well understood in terms of political responses to public and interest group concerns, but what is less well understood are justifications for managed care regulation in terms of well articulated market failures. Also lacking is an examination of how well legal enactments and enforcement activities respond to market failure theory. Accordingly, this article has two distinct parts: A detailed analysis of the market failures that managed care patient protection laws attempt to correct. And, a report of a 50-state survey of state managed care protection laws and their enforcement. We conclude that, while there are some deficiencies in managed care markets as they are constituted currently, overall the patient protection laws are not well designed to address many of the most important deficiencies since few of these laws address the fundamental source of these market flaws. At most, many of these laws attempt to treat only some of the symptoms of market defects. However, these laws are not being neglected by enforcement agencies. Enforcement activities are evident in most states, and the variation in enforcement relates to legitimate differences in legal, market and agency conditions.

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