Managed care and the US health care system

Social Science & Medicine 54 (2002) 1167–1180

Managed care and the US health care system a social exchange perspective David E. Grembowskia,*, Karen S. Cookb, Donald L. Patricka, Amy Elizabeth Rousselc a

Department of Health Services, University of Washington, Box 357660, Seattle, Washington 98195-7660, USA b Department of Sociology, Stanford University, Standford, CA 94305, USA c Health and Social Policy Division, Research Triangle Institute, P.O. Box 12194, Research Triangle Park, NC 27709-2194, USA

Abstract Many countries are importing managed care and price competition from the US to improve the performance of their health care systems. However, relatively little is known about how power is organized and exercised in the US health care system to control costs, improve quality and achieve other objectives. To close this knowledge gap, we applied social exchange theory to examine the power relations between purchasers, managed care organizations, providers and patients in the US health care system at three interrelated levels: (1) exchanges between purchasers and managed care organizations (MCOs); (2) exchanges between MCOs and physicians; and (3) exchanges between physicians and patients. The theory and evidence indicated that imbalanced exchange, or dependence, at all levels prompts behavior to move the exchange toward power balance. Collective action is a common strategy at all levels for reducing dependence and therefore, increasing power in exchange relations. The theoretical and research implications of exchange theory for the comparative study of health care systems are discussed. # 2002 Elsevier Science Ltd. All rights reserved. Keywords: Health policy; Managed care; Price competition; Managed competition; Health care systems; Exchange theory; United States

Introduction Managed care and market competition are diffusing rapidly to industrialized and less-developed countries worldwide for various reasons (Light, 2000; Mechanic & Rochefort, 1996; Azevedo, 1996). First and foremost, countries are struggling to control escalating costs of care and are looking for new mechanisms to control them. In the largely private US health care markets, cost control is achieved through price competition among managed care organizations (MCOs) for contracts offered either by employers or government to deliver health care to their covered enrollees. The exportation of *Corresponding author. Tel.: +1-206-616-2921; fax: +1206-543-3964. E-mail address: [email protected] (D.E. Grembowski).

U.S.-style managed care is nowhere more evident than in Latin America and Asian countries, where governments are less involved in health care (Bosch 2000; Stocker, Waitzkin, & Iriart, 1999; Azevedo, 1996). With limited resources and competing, urgent demands for them, the governments of these countries are less inclined to create massive social security systems, but rather are divesting themselves of public health care systems, and increasingly relying on private markets to control health costs. Developing countries also follow this course because international lending agencies, such as the World Bank and US AID, often stipulate that countries move toward private markets as a condition of receiving aid (Light, 2000; Stocker, Waitzkin, & Iriart, 1999). Industrialized countries also are adopting elements of managed care but for different reasons. To a great degree, competitive markets for health care are irrelevant to European and other industrialized countries that

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have national health insurance systems or national health services (Light, 2000; Mechanic & Rochefort, 1996). Furthermore, these countries already have cost controls}central budgeting, fee regulation, controls on the introduction and diffusion of technology, manpower policies limiting the number and types of health professionals, and so forth}that perform better than managed care and price competition (Mechanic & Rochefort, 1996; Azevedo, 1996; Reinhardt, 1996). What managed care does offer is new ideas and methods for improving system performance–such as making providers accountable for their performance by linking their productivity to payment, introducing greater choice of providers into ‘‘no-choice’’ public systems, and promoting the integration of health and social services}that countries can adopt selectively to reform their health care systems (Light, 2000; Azevedo, 1996). These global trends provide evidence that health care systems are converging, or becoming more similar over time. Initially raised by Mechanic in 1975, the ‘‘convergence hypothesis’’ posits that integrated world economies, rapid diffusion of technology and scientific information, rapid mass communication, and other macro forces create a ‘‘world culture’’ of medicine, where nations face similar problems and adopt similar policies to solve them, but adjust the policies to meet their own circumstances and cultural traditions (Whiteford & Nixon, 2000; Mechanic & Rochefort, 1996; Kirkman–Liff, 1994). The world-wide problem of escalating costs and the widespread turn toward private markets and managed care to control them is a part of this convergence. The convergence toward private markets or selected features of managed care are important given 40 years of international experience that private markets result in inequity, inefficiency, higher costs, and public dissatisfaction (Evans, 1997). Given this alarming track record, why is price competition favored in the US and other countries? Evans (1997) provides one answer: price competition and managed care serve the over-lapping, narrow economic interests of powerful groups in society } the buyers of health care (mainly employers and government), suppliers of medical goods, managed care organizations, and upper-income citizens } who all benefit financially from the economic arrangement of private markets. With more and more countries turning toward private markets and managed care to solve their cost problems, this evidence calls for a greater sociological understanding of how power is organized and exercised in private markets. To close this knowledge gap, our purpose is to apply social exchange theory to examine the power relations between purchasers, managed care organizations, providers and patients in the US health care system. We begin with a brief history of the growth of managed care and an introduction to social exchange theory. Next, we

apply social exchange concepts and examine the early, imbalanced relations among purchasers, managed care organizations, physicians and their patients, which were dominated by purchasers and managed care organizations. Then, we review evidence indicating that the imbalanced relations gradually are becoming more balanced, a trend that is consistent with exchange theory. We conclude with a discussion of our findings and their implications for research and health policy.

Managed care and price competition as social exchange Following World War II, America’s health enterprise entered an era of unprecedented growth. Sales of private health insurance expanded. The numbers of hospitals, physicians and other providers increased dramatically. The growth in covered lives, in turn, stimulated demand for health care, and under traditional fee-for-service (FFS) payment, private and public insurers passively reimbursed whatever physicians and other individual and organizational providers charged. In this ‘‘Golden Age’’ of American medicine, physicians largely controlled the health care system and practiced their profession with relatively little outside interference (Starr, 1982; Light, 1989). As part of the Great Society programs created during the administration of President Lyndon Johnson in the 1960s, Medicare, Medicaid, and other federal health care programs were launched, providing greater access to health care among virtually all population groups (Davis & Schoen, 1978). As technology improved and the number of Americans with some form of employerpaid health insurance increased substantially, so did the utilization and the cost of care. In response to demand and raising costs, employers and other purchasers transformed themselves from passive ‘‘price-takers’’ under fee-for-service reimbursement to active ‘‘pricesetters,’’ where plans compete on the basis of price for their contracts (Light, 1991; Robinson, 1995). To control their financial risks, MCOs favor contracts containing healthy and wealthy people who will likely have lower health costs in the future, while contracts offering similar resources for sicker and lower-income people are avoided. Many analysts agree that employers, federal and state governments, and other purchasers dominate and largely govern the flow of resources in today’s marketbased health system (Robert Wood Johnson Foundation, 1995). From a sociological perspective, ‘‘managed care’’ is fundamentally a shift in power and control of the health care system’s from physicians to organizational purchasers and managed care organizations (Friedman, 1993; Light, 2000), such as preferred provider organizations (PPOs), point-of-service plans (POS plans), independent practice associations (IPAs),

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and health maintenance organizations (HMOs; definitions are presented in the Appendix). While this transformation is well-documented, less is known about the nature of the power relations between purchasers, managed care organizations, providers and patients and the implications of these relations for change. Our purpose is to examine these relations more fully from an exchange perspective. Exchange theory was developed originally by Blau (1964), Homans (1958,1961), and Thibaut and Kelley (1959) primarily to explain social relations among individuals.1 Building on their work, Emerson (1962,1972a,1976) developed the concepts of power and dependence in exchange relations more fully and applied them to social networks. Previous investigators have used social exchange theory to explain behavior in various sectors of the health care system (for example, see Bynder, 1968; Shortell & Anderson, 1971; Shortell, 1973,1974; Cook, Moris, & Kinne, 1982; Grembowski, Andersen, & Chen, 1989; Grembowski, Cook, Patrick, & Roussel, 1998). Exchange theory focuses attention on the relations between actors and the factors that explain the emergence, maintenance and termination of exchange. Relations can be viewed strictly as dyadic (see especially the work of Homans and Thibaut and Kelly), or they can be viewed as connected to form networks of exchange (Emerson, 1972b; Cook and Emerson, 1978; Molm & Cook, 1995). Power dynamics operate at both levels, within the dyadic domain and within networks. In Emerson’s terms, power in exchange relations or networks is based upon the dependence of the actors on one another for resources of value. These resources can be instrumental involving economic or social goods and services, as well as purely symbolic, as in a brand name or reputation. Interdependence and specialization create the necessity for exchange, and all organizations adopt a wide variety of strategies for coping with this interdependence.2 Building on Emerson’s theory and Gold, Nelson, Lake, Hurley and Berenson’s (1995) systems } exchange framework, we define the US health care system as a complex network of exchange relations among individuals and organizations pursuing their own goals and interests in the delivery or financing of health services. For social exchange theorists, key features of 1 Blau (1964) also tried to link exchange processes at the micro-level with macro-level processes in organizations and larger social systems. 2 Much of transaction cost economics is focused on predicting the forms of governance that exchange relations will assume under different economic and social conditions. Williamson (1994) and others have developed principles that help explain the types of organizing strategies actors will use to minimize coordination and transaction costs in managing exchanges central to their goals.

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Fig. 1. Managed care as interconnected levels of exchange.

exchange relations and networks are the power of the actors involved and the strategies they employ to enhance their power in the exchange domains they care about. In the next section we examine these features of exchange in the US health care system.

Managed care as imbalanced exchange favoring purchasers and managed care organizations Given the complexity of the US health system, we begin with a simple exchange model of the system illustrating relationships between the major organizations and providers (see Fig. 1). For simplicity, the model includes only three levels of interconnected exchange under managed care: (1) the macro-level of exchange between organizational purchasers and managed care organizations; (2) a middle-level of exchange between MCOs and physicians; and (3) the micro-level of exchange between physicians and patients. In our complex health system, exchange relations also exist among other health professionals (such as nurses and dentists), hospitals, nursing homes, public health departments, voluntary associations and other organizations. We focus on exchange relations among purchasers, MCOs, physicians and patients in an effort to explain the historical shift in power from physicians to purchasers and MCOs, and because these four groups are often the focus of health policy debates. Fig. 1 depicts exchange relations favoring purchasers and MCOs, with government essentially delegating much of the regulation of US health care system and the cost of health care to private markets (Reinhardt, 1999). This strategy is favored by many elected officials because of the market’s success in controlling health costs, which means that government dollars saved on health care can be devoted to other sectors, and elected

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officials can avoid the thorny political problems that would inevitably rise if government assumed this role. At the micro-level of the model, we assume that a patient has resources to exchange for health care through a MCO (about 73% of people with private insurance are enrolled in managed care organizations; Jensen, Morrisey, Gaffney, & Liston, 1997). However, about 41 million adults and children do not have health insurance (Kilborn, 1998). When people who want health care but have no money or insurance to pay for it, they have less resources to exchange for health care and therefore, have even less power in the health care system than people with insurance and higher incomes (Reinhardt, 1996). For uninsured Americans with low incomes, the end result is greater dependence on charity care from public hospitals and clinics, inequitable access to health care, and harmful health outcomes (Steinhauer, 1999b; Reinhardt, 1996). In the next sections we review each level of exchange as depicted in Fig. 1. Macro-level exchange between purchasers and MCOs Exchange at the macro-level entails ties of mutual dependence between purchasers and MCOs (Emerson, 1962). Purchasers are dependent on MCOs for the financing and the delivery of health services, while MCOs are dependent on purchasers for a population of enrollees and therefore, revenue.3 The dependence of MCOs on purchasers increases with the value of the benefits that purchasers can provide to MCOs and decreases with MCOs’ access to alternative sources of those benefits (Cook, 1977). Thus, the dependence of an MCO on purchasing organizations will decrease if there are multiple purchasers of its services. In contrast, a single purchaser will increase the MCO’s dependence. Dependence is a source of power in exchange relations. The greater the dependence of the MCO on the purchaser, the greater is the power of the purchaser over the MCO (Theorem 4 in Emerson, 1972b). Conversely, MCOs have a power advantage if they are less dependent in the exchange relation, or if the purchaser is dependent on the MCO. Unequal powerdependence relations, where one party has a power advantage over the other actor, typically result in imbalanced exchange, where outcomes usually favor 3 Capitation also is increasing the dependence of MCOs on purchasers. To survive under capitation financing, a MCO must be able to control costs and increase its number of capitated enrollees (Coile, 1994). As capitation displaces fee-for-service reimbursement in health markets, managed care organizations become increasingly dependent on these covered lives. According to Jerry Pogue, capitation is the ‘‘cocaine’’ of medical payments, where providers get ‘‘hooked’’ on a capitated cash flow, whether they are seeing those covered lives or not (Coile, 1994).

the less dependent, or more powerful, party (Emerson, 1962; Molm & Cook, 1995). In contrast, equal powerdependence relations are characterized by balanced exchange, where both parties benefit mutually from the exchange. Defined in this way, power is not a personal or organizational attribute but rather results from the structural relations between purchasers and MCOs and the networks in which they are embedded (Molm & Cook, 1995). Emerson has argued that, in general, exchange relations tend to move toward balance: the greater the imbalance of a purchaser–MCO exchange at one point in time, the more likely it will move toward balance at a later point in time (Theorem 5 in Emerson, 1972b). For example, if a purchaser is less dependent in the exchange, a purchaser may use its power advantage to gain more rewards from the MCO (Corollary 1.3 in Emerson, 1972b). This action actually increases the dependence of the purchaser on the MCO while decreasing the dependence of the MCO on the purchaser, moving the relation toward greater equality of power. Put another way, often the use of power paradoxically results in a loss of power over time. The predictable shift from power-imbalanced toward power balanced exchange is determined primarily by the structure of the relations, not necessarily the intentions of individuals to gain more from the exchange (Molm & Cook, 1995). Like all exchange relations, purchaser–MCO relations may move toward a balance of power through any one or a combination of four ‘‘power-balancing operations’’ (Emerson, 1962,1972b). If a purchaser holds a power advantage, change toward a more balanced distribution of power may occur by the MCO’s withdrawal from the exchange (the value of the purchaser’s resources declines for the MCO), status giving (the value of the purchaser’s resources increases for the MCO), network extension (an increase in alternative purchasers for the MCO), or coalition formation (a decrease in alternative MCOs for the purchaser, for example, through MCO mergers). Because the latter two strategies involve changes in the network of exchange relations, they are important concepts for explaining changes in the structure of power and dependence in the health care system. The operations also can increase imbalanced exchange. For example, coalition formation in most any form enhances bargaining power, regardless of whether the organizations were formerly weak or strong (Cook & Emerson, 1984). At the macro-level in Fig. 1, many employers and other purchasers, faced with higher costs (premiums) for health care, have formed coalitions to achieve a power advantage in their exchange relations with MCOs. By having a power advantage, large purchasing coalitions can dictate the terms of the exchange. Perhaps the best-known example is CalPERS (California Public Employees’ Retirement System), the

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purchasing alliance for over 900,000 employees in 877 state and local governments in California (US General Accounting Office, 1993). In an unprecedented display of market clout, CalPERS achieved 0.4–5.3 percent reductions in health insurance costs in each year between, 1993 and 1995 (Bodenheimer & Sullivan, 1998). The reductions are impressive, given that employer health care costs increased 17–19 percent each year between 1988 and 1990. Today, the evidence clearly indicates that organizational purchasers largely control premiums and therefore, the cost of health care (Health Tracking, 1995). This pattern indicates that Emerson’s ‘‘power-balancing’’ operations can be viewed more simply as ‘‘power-gaining’’ strategies which vary depending on the structural location of the actor (or the level of the actor’s power). More powerful actors will attempt to preserve power, while those at a power disadvantage will attempt to gain power. Because power is a function of resource-dependence in exchange relations, the common objective of organizations and individuals at all three levels is to avoid being controlled by, or dependent on, others (Cook, 1977; Oliver, 1991; Nystrom & Starbuck, 1981). Just as purchasers have used coalition formation to gain power advantages, so have MCOs responded in similar fashion, merging, consolidating, and forming alliances or other types of coalitions to reduce their dependence in their exchange relations with purchasers (Magel, 1999; Zelman, 1996; Kaluzny, Zuckerman, & Ricketts, 1995; Shactman & Altman, 1995).4 These may be voluntary and mutually protective coalitions designed to maintain existing resources and reduce the power advantage of purchasers over MCOs, such as the recent merger of Group Health Cooperative of Puget Sound and Kaiser Permanente in the Pacific Northwest of the US (Kuttner, 4

Consolidation or coalition formation is only one form of alliance, and different types of alliances use different governance structures, some more hierarchical than others, depending upon the joint interests involved. Such joint ventures may include shared equity, other alliances involve very little or no sharing of equity. As Gulati and Singh (1998) point out, alliances involving shared equity are more likely to include hierarchical controls than those without shared equity. They also suggest that alliances are formed to reduce both transaction costs under conditions of uncertainty, as well as coordination costs. MCO mergers often require purchasing power, or capital. An important source of capital is the stock market, at least for those for-profit MCOs that are publicly traded (Srinivasan, Levitt, & Lundy, 1998). In return for their investment in MCOs, shareholders expect to receive profits, and it is the role of management to deliver them by controlling costs and closely regulating providers’ behavior (Terris, 1998). More research is needed to understand the influence of this exchange on the relations in the model and the performance of the health system (Srinivasan et al., 1998).

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1998). MCOs, hospitals and other organizations also may enter into predatory coalitions to acquire new resources, achieve a competitive advantage over other organizations, and improve market share. A prime example is the Columbia/HCA for-profit hospital chain, which expanded from 95 hospitals in 1994 to over 300 hospitals a year later (Zelman, 1996). MCO mergers may reduce competition in local markets, raising possible violations of antitrust legislation (Feldman, Wholey, & Christianson, 1999; Bodenheimer & Sullivan, 1998; Shactman & Altman, 1995). If the power advantage of MCOs approaches a monopoly in local markets, it may be used unfairly to extract price concessions from both physicians and from purchasers, which may be retained as profits instead of used to lower premium costs. In response, government antitrust activity aimed at MCOs might occur in the future (Shactman & Altman, 1995), or purchasers may reduce their dependence on MCOs by direct contracting with providers, which is a type of balancing operation (network extension), that increases the number of groups competing for their contracts (Bodenheimer & Sullivan, 1998). Middle-level exchange between MCOs and physicians Coalition formation by purchasers and MCOs at the macro-level has produced an imbalanced MCO–physician exchange favoring MCOs at the middle-level. An oversupply of physicians in most urban areas also accounts partly for the greater dependence of physicians in their exchange relations with MCOs and their managers (Tarlov, 1988; Terris, 1998). To control costs, MCOs have used their power advantage by developing provider networks}the single, common element of MCOs and the essential mechanism for controlling their costs (Miller & Luft, 1994; Reinhardt, 1996)}composed of physicians with lower-cost practice styles, and by placing restrictions on patient access to providers outside their networks. In areas where an oversupply of physicians exists, physicians exchange the competitive advantage of securing patients from the MCO for administrative controls over their clinical autonomy and income (Grembowski et al., 1998). In short, as physician supply has grown, so has physician dependence on MCOs for employment and a steady supply of patients, decreasing physician power in the exchange (Etheredge, Jones, & Lewin et al., 1996; Tarlov, 1988; Cook, 1977). Through their power advantage, MCOs impose constraints and incentives on physicians to reduce the costs of their clinical and administrative decisions. MCOs typically influence physician decisions through financial incentives, provider networks, and utilization management (Grembowski et al., 1998). Financial incentives include whether the health plan is capitation

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or fee-for-service, how the physician is paid, and whether the physician receives a bonus or has a financial withhold for referrals. Provider networks can control costs by building networks with lower utilization rates, limiting the size of the network, or installing primary care physicians as gatekeepers to specialty care. If a MCO invites a physician to join its network, the MCO may use its clout and force physicians to either participate in all of its health insurance plans or none at all (American Health Line, March 15, 1999a). Utilization management captures preauthorization requirements for referrals to specialists and hospital care. Other things equal, as the number and strength of an MCO’s controls increase, so does the intensity, or ‘‘managedness,’’ of managed care. MCOs would not be able to influence physician behavior without the tools for doing so. The trend toward ‘‘outcomes management’’}a broad term that includes disease management, clinical guidelines and pathways, evidence-based medicine, and cost-effective care–provides an array of tools for justifying treatment restrictions based on outcomes as well as cost, and removing control of decision making from individual doctors. This pattern is captured by the ‘‘I=T ratio,’’ a concept developed by Jamous and Peloille (1970) three decades ago in their study of university–hospital relations in France (Coburn & Willis, 2000). The basic assumption of the ratio is that professional practice of medicine can be divided into two parts: (1) the ‘‘art’’ or practice of medicine (indetermination) that is not based on well-defined rules and therefore is less reproducible across clinical settings; and (2) the knowledge of medicine based on science (technicality) that is based on well-defined rules that are reproducible across settings. The lower the I=T ratio, the more physicians are open to the rationalization and routinization of their work. Developed by clinical epidemiologists, economists and others, clinical guidelines and other forms of evidence-based medicine lower the I=T ratio by increasing technicality while reducing indetermination (Coburn & Willis, 2000). As a consequence, physician control over medical knowledge is undermined, which reduces their power in exchange relations with MCOs and opens them to the cost controls imposed by MCOs. Information systems are the management technology for making these tools work in MCO networks. Information systems support evidence-based medicine by developing performance standards based on treatments delivered to thousands of patients, profiling physicians’ treatment patterns, and identifying physicians that deviate significantly from the standard. Information systems also support utilization management, where physicians’ recommended treatments must be preauthorized by the MCO } based on the evidence } before it will pay for them. In contrast, physicians often lack comparable information resources and are,

therefore, ill-equipped to contest MCO treatment protocols derived from MCO data bases (Beckham, 1998). The usual result is imbalanced information exchange and therefore, treatment protocols favoring MCOs.

Micro-level exchange between physicians and patients In the doctor–patient relationship, health services are provided through an exchange process (Grembowski, Anderson, & Chen, 1989). The patient is dependent on the physician’s knowledge and competence for restoring or maintaining health. Similarly, the physician is dependent on the patient for income, new patient referrals, as well as less tangible rewards, such as compliance, praise and appreciation. Information giving also affects the balance of power in the doctor–patient relationship: the more information that physicians provide to patients, the less dependent is the patient on the physician, and the more balanced is the relationship (Grembowski et al., 1989). In studies conducted before the era of managed care, the evidence indicates that physicians dominated the relationship and largely determined the treatment patients received (Freidson, 1988; Starr, 1982; Dranove & White, 1987). Most patients regarded this power as legitimate and generally deferred to the physician’s judgement. In imbalanced physician–patient exchanges, the degree of trust influences the shift toward balance and may reduce the physician’s actual use of power in the exchange (Turner, 1987; Molm, 1987). From an exchange perspective, trust enhances social responsibility in long-term patient–provider relationships (Emerson, 1976; Meeker, 1971). Because doctors have medical expertise and the authority to define patient needs, the potential for physician exploitation and patient distrust exists in their exchange relations, especially in brief or one-time-only encounters. In response, legal and ethical norms and expectations exist to establish the patient’s welfare}not the physician’s financial gain from the relationship}as the doctor’s primary responsibility (Gray, 1991; Shortell, Waters, Clarke, & Budetti, 1998). When mutual trust emerges from the reciprocal exchange of positive rewards in a continuous doctor– patient relationship (Meeker, 1971), the patient has less need to protect his or her own interests in the relation. As a consequence, patient uncertainty}and, therefore, dependency}is reduced, moving the relationship toward balance, which ultimately may produce better outcomes of care (Davies & Rundall, 2000). In contrast, in imbalanced relations (where outcomes favor the less dependent, or more powerful, party), exploitation and erosion of trust may result in the patient’s withdrawal from the relationship, which also balances the exchange (Molm & Cook, 1995; Emerson, 1972b).

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Exchange relations at the macro-level can affect the doctor–patient relationship at the micro-level in either a beneficial or harmful manner. Employers contract with MCOs to provide care to employees and their dependents. When an employer establishes and maintains a MCO contract over a number of years, the long-term employer–MCO relation increases the likelihood that doctors and patients can establish long-term relations at the micro-level, which can contribute to better continuity and outcomes of care, assuming that physician–MCO relations also remain stable. In contrast, if a purchaser terminates its health care arrangements to contract with a new, less costly MCO, the change increases the odds that doctor–patient relationships will be disrupted at the micro-level, reducing the continuity and potentially the quality of care (Carrasquillo, Himmelstein & Woolhandler, 1998; Flocke, Strange, & Zyanski, 1997). Perhaps the best-known example occurred in 1988 when Allied-Signal Corporation saved millions in health care premiums by abruptly canceling its health care contracts and switching its 80,000 employees and dependents into Cigna’s HMO plans (Bodenheimer & Sullivan, 1998). Similar trends are occurring in exchange relations between government and MCOs, but in this case the MCOs are the source of the disruption in patient– physician relationships. Faced with financial setbacks and escalating costs, some MCOs have abandoned their Medicare HMO plans, leaving their Medicare patients with few options but to enroll in the standard Medicare plan and pay more out-of-pocket for supplemental insurance (Morrow, 1998). In short, private purchasers and MCOs can withdraw from or modify their exchange relations when the costs of the exchange exceed its rewards, which may disrupt care or leave their employees and dependents uninsured (Bodenheimer & Sullivan, 1998). At the middle-level, exchange relations between MCOs and physicians also can affect doctor–patient relations in either a beneficial or harmful manner. Socially oriented, nonprofit HMOs typically emphasize prevention and cost-effective treatments, and their physicians are monitored regularly to promote ‘‘best practice’’ medicine (Kuttner, 1998). For example, Group Health Cooperative of Puget Sound is a national leader in integrated case management and is creating innovative models for managing patients with chronic illness which shift power to patients in the patient–provider exchange (Kuttner, 1998; Wagner, 1998). Such efforts to improve care can build patient loyalty and trust in the organization, which may have a beneficial influence on continuity of care and doctor–patient relations at the micro-level. Achieving these benefits, however, requires physician networks with little turnover, which can disrupt physician–patient relationships and coordina-

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tion of care, and lower turnover may be more likely in staff-model MCOs like Group Health. In contrast, market-oriented MCOs have more stringent preauthorization systems to approve or deny care, and impose greater financial incentives on physicians to withhold or limit care (Kuttner, 1998). Mounting evidence suggests that such practices at the middle-level may be eroding trust and harming the Physician–patient exchange at the micro-level (Larson, 1996; Mechanic, 1996, 1998; Mechanic & Schlesinger, 1996). At the macro-level, when purchasers gain clout and become price-setters, MCOs become price-takers and must develop effective mechanisms to control their costs, such as building a network of physicians with lower rates of utilization and costs. By being part of the MCO’s network, the primary care physician’s role can shift from patient advocate to allocator of higher cost specialty services in the MCO’s network (Gray, 1991; Mechanic, 1994). In the past, some MCOs created incentives or policies to discourage physicians from either disclosing fully all treatment options to patients or granting access to those treatments (Woolhandler & Himmelstein, 1995; Kassirer, 1995; Mechanic, 1994), creating a conflict of interest that can influence the power balance in the doctor–patient relationship (Emanuel & Dubler, 1995; Shortell et al., 1998).5 In terms of exchange theory, the physician’s dilemma is deciding whether the value of rewards in the MCO–physician exchange outweighs the value of rewards in his or her relations with patients. When these incentives exist and the MCO–physician exchange prevails, patient wariness may replace trust (Kolata, 1990), imbalancing the exchange and increasing the potential for patient dissatisfaction, withdrawal from the relationship (a type of balancing operation), and searching for a new physician (a form of network extension that balances the exchange).

Moving from imbalanced toward more balanced exchange relations Social exchange theory predicts that the imbalanced exchange relations described in the previous section would gradually shift toward more balanced relations over time. In this section, we review the evidence indicating that the US health care system is moving in this direction. Light (1991, 2000) uses the concept of ‘‘countervailing power’’ to describe the historical, behavioral cycle where one party accumulates such 5

Physicians serve as ‘‘information gatekeepers,’’ influencing the extent of patient knowledge in an episode of care. By withholding information from patients, providers can increase the patient’s uncertainty and, hence, dependence on the provider (Theorem 3 in Emerson, 1972b; Waitzkin, 1985).

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power that other parties react by increasing their efforts to control the first party. Trends toward balance in each level of Fig. 1 are examined below. Macro-level exchange between purchasers and MCOs In imbalanced purchaser–MCO relations, exchange favored purchasers, who were price-setters rather than price-takers. However, current forecasts indicate that MCOs will experience double-digit rate increases in 2000, suggesting purchaser–MCO relations are moving toward balance (Rundle, 1999). CalPERS, the nation’s second largest health care purchaser, has approved an average 9.7% rate increase to MCOs providing care to its members (Rundle, 1999). The trend toward balance at the purchaser–MCO level is promoted by similar trends in the other levels of Fig. 1. Middle-level exchange relations between MCOs and physicians Just as coalition formation was the primary mechanism for moving purchaser–MCO relations towards balance, coalition formation also is a common mechanism for doing so in MCO–physician relations. Physicians and other providers are forming unions, which decrease the number of alternative sources of care for the MCOs to contract with, and this moves the MCO–physician exchange toward a balance of power (Leib, 2000; Greenhouse, 1999; Beason, 1998; American Health Line, 1998c,d). Physicians of all types are forming large, single- or multi-specialty group practices and physicianrun networks to increase their clout in negotiations with MCOs or to bid against MCOs for contracts from purchasers (American Health Line, April 22, 1998b; Beckham, 1998; Hammonds, 1998; Kletke, Emmons, & Gillis, 1996; Lim, 1996; Shactman & Altman, 1995).6 When purchasers by-pass MCOs and contract directly with large physician groups (Bodenheimer & Sullivan, 1998; Health Tracking, 1995), the middle exchange 6 In August 1996, the Federal Trade Commission and the Justice Department relaxed antitrust guidelines to allow doctors to form physician-operated networks (Pear, 1996). In the past such joint–physician ventures were prohibited by law because network doctors must agree on prices, and such price-fixing was viewed as harmful to competition. Proponents argue that physician networks may encourage competition because they offer more alternatives to MCOs. By increasing alternatives to doctors (a type of network extension), the MCO–physician relation, in principle, might also move toward balance. However, under the new guidelines, MCOs still have an advantage because they have more capital than their physician competitors (Kuttner, 1997). In the future, if policy makers propose legislation to curtail collective action in the health care system, we recommend rigorous policy analyses to assess its predicted effects on dependence levels in exchange relations.

between MCOs and physicians (see Fig. 1) moves toward balance through two balancing operations, withdrawal (physicians’ termination of at least some MCO relations) and network extension (physician groups contracting directly with purchasers). In a similar way, the so-called ‘‘any willing provider’’ laws, which require MCOs to open their networks to any provider who wants to join, also would lead to greater power balance in the MCO–physician exchange. Recall that provider networks are the common element of MCOs and are critical for controlling utilization and costs. Any legislation that undermines MCO control of their networks largely undermines their power advantage in their exchanges with providers. It is not surprising that MCOs, as well as large purchasers who also favor cost control, strongly oppose such state or federal legislation (American Health Line, 1998a). In some cases, physicians are balancing their exchanges with MCOs by withdrawing from their relationships (Marquis, 1999; Steinhauer, 1999a). Some physicians are dropping plans with the lowest reimbursement rates or the most administrative hassles. Others are taking more extreme measures by moving their practices to markets with low penetration of managed care, cutting all of their ties with MCOs, or choosing early retirement. Other physicians are attacking the tools which MCOs use to influence clinical decisions (Barker, 2000). Millman and Robertson, a world-wide consulting firm, has developed money-saving clinical guidelines for health care that are widely used by MCOs. A recent, physicianled lawsuit is challenging the guidelines partly because they may harm the health outcomes of children. Unrelated class-action lawsuits against health insurers in New Jersey and Florida also attack MCOs for relying too heavily on the Millman and Robertson guidelines for managing care. In terms of the I=T ratio described earlier, efforts to reduce MCO reliance on clinical guidelines reduces the technicality dimension of the ratio, which increases physician control over their work. Other strategies for reducing physician dependence on MCOs also exist but have not been employed widely. For example, physicians could reduce their dependence on MCOs by greatly increasing the percentage of physicians who are members of the American Medical Association (a type of coalition formation), which is about 35% (source: American Medical Association). In principle, national and state medical associations with more physicians might have more clout in framing the terms of physician–MCO contracts across jurisdictions than associations with fewer physicians. Alternatively, as a long-term strategy the oversupply of physicians could be reduced, which would decrease the number of alternative sources of care for MCOs and move the MCO–physician exchange toward balance. We may not observe these strategies because physicians}and the

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medical schools which produce them}are not a homogenous group and consequently, do not behave in a similar manner. Indeed, many of the people running MCOs and their utilization control and financial incentive systems are themselves physicians (Kuttner, 1998). Over the past decade medical schools have maintained rather than decreased admission rates, and are graduating more primary care physicians to satisfy the personnel demands of MCOs (Jolly & Hudley, 1997). Micro-level exchange between physicians and patients Patients typically have imbalanced exchange relations with physicians and MCOs. Patient–physician exchange is imbalanced because of the patient’s dependence on medical knowledge of the physician. Today, however, the widespread, daily dissemination of health information to the public can reduce patient dependence in their exchange relations with physicians as well as MCOs. For the ‘‘activated’’ patient, access to more information about alternative treatments and sources of care through the press and the Web can reduce the patient’s uncertainty and consequently, promote more balanced relations with physicians and their MCOs. Similarly, patients can reduce their dependence on physicians by seeking care from ‘‘alternative’’ medical providers, such as chiropractors, acupuncturists, or massage therapists (Astin, 1998). Patients also have imbalanced exchange relations with MCOs, and the national ‘‘backlash’’ against HMOs and other managed care organizations suggests that dissatisfaction and the erosion of trust are widespread (Bodenheimer, 1996; Church, 1997; Duff, 1998). In one national poll, adults were asked to rate 11 high-profile industries based on service to consumers, and MCOs were ranked at the very bottom along with tobacco companies (American Health Line, April 28, 1999b). In other national polls, 86% of respondents said MCOs were more concerned with cost containment than providing quality care (Duff, 1998), and 60% favored tougher government regulation of MCOs (American Health Line, 1998e). In response, 46 states and the District of Columbia have passed measures to regulate MCOs (Kuttner, 1998). Several states and the federal government have approved ‘‘anti-gag clause’’ legislation designed to prohibit MCOs from curtailing physicians’ rights to talk openly about all treatment options with their patients (Gray, 1996). Many policy makers and interest groups are calling for a ‘‘sweeping patients’ bill of rights,’’ including the right to sue one’s HMO, in response to growing public distrust and dissatisfaction with MCOs (Mechanic, 1997; Kilborn, 1998). Indeed, in 1999 California passed legislation that allowed enrollees to sue their HMOs and seek second opinions and external review for treatment grievances, created a new

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state Department of Managed Care to monitor HMOs and perform patient advocacy, and installed other changes (Shinkman, 1999). Similar legislation is being considered by Congress. Purchasers and MCOs generally oppose such measures (Kilborn, 1998), and many purchasers, though still concerned with costs, seek to provide better quality of health care to avoid more intrusive regulations in the future (Freudenheim, 1998). As a whole, these counterbalancing efforts, as well as the economic expansion of the 1990s, are currently moving the imbalanced relations in Fig. 1 toward balance. Recall that many purchasers of health coverage are employers, and employers also have exchange relations with their employees. As the 1990s economic expansion accelerated and labor markets tightened in the US, employer dependence on employees increased. Consequently, employers and MCOs are responding to employee concerns about MCO restrictions by offering employees more choice (Martinez, 2001; Winslow & McGinley, 2001), for example, by allowing enrollees to seek care outside MCO networks, usually at additional cost although a referral from a primary care physician may still be required (Bodenheimer, 1999), by expanding the network and benefits to include different types of providers (such as social workers, acupuncturists or other alternative providers), or by increasing the number of plans offered to employees. In particular, UnitedHealth Group, which insures 14.5 million people, recently announced that doctors in its network can make clinical decisions without the Group’s preapproval, a long-standing source of frustration for both doctors and patients (Freudenheim, 1999). These steps reduce patient dependence in their relations with employers, MCOs and physicians, but they still miss the root of the managed care backlash, the fear that a MCO will deny or limit care when a person becomes seriously ill (Kuttner, 1998; Duff, 1998; Hunt, 1998). The call for more regulation of MCOs implies that the organizations and individuals in Fig. 1 also have exchange relations with government, which can impose laws and regulations that either support or hinder employers, MCOs, physicians and patients in pursuing their interests. Historically, the federal HMO Act of 1973 and ERISA (the Employee Retirement Income and Security Act) have encouraged the growth of HMOs and protected self-insured employer plans from litigation (Kuttner, 1998). However, recall that elected officials are dependent on voters for re-election, and many voters also are patients in MCOs. When public opinion polls, media investigations, and consumer advocacy groups express support for more government regulation of MCOs, elected officials may approve such measures in exchange for possible voter support at the next election (Hunt, 1998). In short,

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while patients may have the greatest dependence and therefore, the least power of all actors in Fig. 1, government may impose laws and regulations that move patients’ exchange relations with physicians and MCOs toward balance.

Summary Exchange relations in the US health care system create ties of mutual dependence. Fig. 1 depicts a ‘‘chain of power and dependence’’ in the health care system, where purchasers hold a power advantage over MCOs, MCOs hold a power advantage over physicians, and at the end of the chain, physicians hold a power advantage over patients, who have the least amount of power in the model. In the early days of managed care and price competition, purchasers largely controlled economic exchange in the health care system, and physician control has been diluted significantly through controls imposed by MCOs (Etheredge et al., 1996). The common objective in all of these relations is to avoid being controlled by, or dependent on, others. Exchange theory posits that ‘‘imbalanced’’ relations with unequal dependence tend to move toward ‘‘balance,’’ or equal dependence, and our analysis indicates that exchange relations at all three levels in Fig. 1 have moved toward balance in the last decade. However, a power balance does not represent an equilibrium state (Emerson, 1972b). The US health system is a very complex network of dynamic exchange relations. At any point in time some will be balanced; others will be imbalanced, motivating the use of powerbalancing mechanisms, which in turn create further changes in the network. Over time, these changes alter the distribution of power among the individuals, groups and organizations in the network.7 7 Recently, exchange theorists have begun to examine more closely the conditions under which imbalanced exchange relations shift toward balance and when balanced relations become imbalanced. Molm (1997) suggests many of the changes implied by Emerson’s (1972b) power–balancing mechanisms are not automatically induced by the occurrence of inequality in the structure of the exchange relations. For example, increasing the available alternatives for the less powerful actor requires the capacity to obtain new exchange partners. Lawler (1992) even suggests that balanced relations may be unstable because in such relations both parties are motivated to increase their structural advantage in the relationship. As Molm notes (1997, p. 38), ‘‘while disadvantaged actors are motivated to change the structure, advantaged actors are equally motivated to resist change } and their current power advantage should give them the upper hand in the struggle for power’’ } which implies that purchasers and MCOs may retain the upper hand in the US health care system in the future.

Theoretical and research implications Our goal was to apply social exchange theory to examine power relations in the US health care system. Social exchange theory also can be used to examine power relations in the health care systems of other countries. For example, Light (1991,1997) describes the transformation of the United Kingdom’s National Health System (NHS) from a nationally administered delivery system into a network of competitive contracts. Beginning in 1989, the government remained the major source of public funds for health services and allocated funds to two types of purchasers: (1) regional and district health authorities of the NHS, which offered contracts for the delivery of hospital and specialty care, as well as community, home, and mental health services; and (2) large groups of general practitioners (GPs), who provided primary care and purchased elective specialty services. Sellers consisted of specialists, hospitals and community services, who competed for contracts offered by the purchasers. Planned exchange relations between the government, purchasers, and sellers are indicated by lines A and B in Fig. 2. Focusing on the government } purchaser exchange (line A), purchasers are dependent on the government for revenue, while the government is dependent on the purchasers to engage in competitive contracting. Because the dependence of the purchasers on the government is greater than vice versa, the government has a power advantage in the exchange. Similarly, the sellers of health services are dependent on the purchasers for revenue (line B), and purchasers have a power advantage in the exchange with sellers. Compared to the former system, sellers would have more freedom to develop their own business plans, borrow money, set wages and perform other financial activities. A key assumption of market competition is that inefficient sellers would not win contracts from purchasers and would go out of business. Fearing the political repercussions of bankrupt hospitals and disrupted services under competitive contracting, the government

Fig. 2. A simple exchange model of competitive contracting in the United Kingdom (1989).

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replaced market competition with ‘‘dictated’’ competition’’ by intensively regulating purchaser–seller relations. In exchange relations between government and purchasers (line A), government controlled contracting to preserve previous funding patterns. The government also entered into exchange relations with sellers (line C) and used its power advantage in the exchange to control prices, limit borrowing and generally manage the financial practices of sellers. In short, the government managed the exchange relations, or contracting, between purchasers and sellers (line B) through its exchange relations with each party (lines A and C). By exercising its power advantage over purchasers and sellers, the exchange relation between purchasers and sellers (line B) moved toward balance. By 1993, ‘‘managed competition’’ was replaced by ‘‘managed cooperation,’’ where purchasers and sellers work collaboratively to allocate funds through needsbased budgets. Laws and regulations were revised to support the change, and by 1996 the NHS was placing renewed emphasis on various forms of cooperative purchasing, partnerships and long-term agreements (Light, 1997). This exercise illustrates that exchange theory can be applied to different health care systems, which may improve our understanding of how power is exercised within them. A comparison of the US and British health care systems suggests that variation exists in exchange relations across countries. Further comparative research of health care systems is recommended to understand the variation in the exchange–power relations across countries and factors that influence them. For example, the British experience suggests that in national systems of health care, governments can have a power advantage, and the use of this power advantage may be an important factor explaining variation in exchange relations across national systems. In contrast, countries with private markets may have different forms of managed competition, which may lead to different power structures with different balanced–imbalanced exchange relations. The exportation of US-style managed care to other countries provides opportunities for examining exchange relations in emerging, market-based health care systems, and whether their exchange relations are similar or different than those observed in the US. Over time, the comparative findings from public and private health care systems would accumulate and eventually might lead to an exchange-based theory explaining the power structures of health care systems and their implications for system performance.

Acknowledgements Funding support for this paper came from the Agency for Healthcare Research and Quality (formerly

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AHCPR) Grant No. HS06833 and the Robert Wood Johnson Foundation Grant No. 036448.

Appendix . Major types of managed care organizations in the united states PPO (Preferred Provider Organization): A health plan with a network of providers whose services are available to enrollees at lower cost than the services of nonnetwork providers. PPO enrollees may self-refer to any network provider at any time. POS (Point-of-Service Plan): A managed care plan that combines features of both prepaid and fee-for service insurance. Health plan enrollees decide whether to use network or non-network providers at the time care is needed and usually are charged sizable copayments for selecting non-network providers. IPA (Independent Practice Association): An HMO (Health Maintenance Organization) that contracts with individual physicians to provide services to HMO members at a negotiated per capita or fee-for-service rate. Physicians maintain their own offices and can contract with other HMO’s and see other fee-for-service patients. HMO (Health Maintenance Organization): A managed care plan that integrates financing and delivery of a comprehensive set of health care services to an enrolled population. HMO’s may own and operate their own clinic facilities or contract with independent practices in the community. HMO’s establish provider staffs either through direct employment or contract.

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