Causal Chains and Cost Shifting: How Medicare's Rescue Inadvertently Triggered the Managed-Care Revolution

The conventional wisdom on how managed care came to replace traditional fee-for-service reimbursement as the nation's dominant mode of health insurance is that enlightened businesses and their employers led the way in responding to the emergence of market forces in health care in the 1990s. A common textbook treatment of managed care's ascendancy puts it this way: “Transformation of the health care delivery system through managed care has been driven principally by market forces, and reinforced by government.” The irony is that the opposite sequence of events is a more accurate portrayal of what actually happened. As this article shows, the transformation of America's health-care system through managed care was initially triggered—albeit indirectly—by government actions and then driven by market forces. In other words, before business behavior was a cause of managed care's extraordinary growth, it was largely a response to and an unintended consequence of government policymaking: in this instance, Congress's reform of Medicare in 1983.