The administration of managed care includes what

Employer's Demand Health Plan Accountability

Employer financing is the foundation of the American health care system. Approximately 80% of all health care is financed by employers in some form. Group health, workers' compensation, short- and long-term disability and retiree health care is predominantly financed by employers. Contrary to popular belief, government or public funding constitutes a significantly smaller proportion via Medicare, Social Security, Medicaid, and other assistance programs (e.g., Centers for Medicare and Medicaid). For some, there is a widespread fear that MCOs increase profits at the expense of quality (Armstead & Leong, 1999).

There are at least four basic mechanisms for assuring health plan accountability: the managed care industry itself, external review, the legal system, and marketplace demands (Gosfield, 1997). The focus of this section will be on the purchaser strategies to ensure that their employees are receiving medically necessary, cost-effective, and efficacious services. The managed care industry initially policed itself through voluntary accreditation programs. Voluntary self-policing yielded to mandatory controls within the managed care industry, especially as their trade groups grew in membership and scope. Since the mid 1990s, public concern over quality has led to skepticism regarding the degree to which MCOs self-police. Each new horror story published in the media concerning denied services (e.g., “drive-through deliveries” or “gag rules”) raised the specter of suspicion among consumers. Many began to question metaphorically, was the fox designing and guarding the chicken coop? As a result, it is generally perceived to be far more credible when an MCO, or any entity for that matter, is held accountable by an independent arm's-length entity. Inversely, payers are somewhat suspicious of peer review when conducted within a network, which partly explains why external utilization-peer review will continue to exist.

Employers are increasingly demanding quality measures from the health plans that serve their employees (Hibbard et al, 1997; Beauregard & Winston, 1997). Ironically, and perhaps justly so, managed care plans which aggressively hold providers accountable for their actions are now under pressure to demonstrate both financial performance (e.g., cost savings) while enhancing quality and outcomes. There was a time when few employers were self-insured; however, today more and more employers are gravitating towards self-insurance. Those employers who continue to pay insurance premiums to a third-party insurer or managed care plan indirectly control their costs though selection of carriers. They accomplish this by comparing managed care plan performance benchmarks and employee satisfaction surveys; renegotiating premium rates or benefit packages; and, ultimately, through selecting the highest-ranked plans. Through the mid1980s, it was common for employers to offer dozens of HMO choices to their employers. Today, most employers offer one or two HMO choice plans to avoid the cumbersome task of assessing multiple plans' performance. It should also be noted that consolidation within the managed care sector also contributed to a smaller selection of plans.

National Committee for Quality Assurance

The National Committee for Quality Assurance (NCQA) is a 501(c)(3) non-profit organization whose mission is to improve health care quality everywhere. NCQA was founded in 1993 and is perhaps best known by its “Health Plan Report Card.” This report card is used by employers and government purchasers to compare and contrast the performance of various health plans. NCQA offers employers a set of standardized performance measures (Health Plan Employer Data and Information Sets [HEDIS]) designed to ensure that purchasers, as well as consumers, have reliable information with which to compare and contrast health plans. HEDIS involves 60 standardized performance measures developed and maintained by NCQA. These quality measures address process, structure, outcomes, and consumer satisfaction. NCQA also promotes other quality improvement initiatives including Disease Management Accreditation & Certification, Report Card for Managed Behavioral Healthcare Organizations, Physician Organization Certification, Credentials Verification Organization Certification, and Utilization Management Certification.

Managed Care Organizations: A ‘Nexus of Contracts’

In the United States, MCOs contract with private sector employers and government programs to manage the health benefits of their employees or program enrollees. To a lesser degree, MCOs also contract directly with individuals to provide health insurance coverage. As organizations, the revenues of MCOs depend on their ability to satisfy the demands of their purchaser-customers. As long as there are alternative MCOs, unhappy customers can decide not to renew their existing contracts, by seeking alternative MCOs that better meet their demands. In this article, the term ‘purchasers’ is used to refer to employers and government programs.

Typically, the core services that purchasers contract with MCOs to deliver include (1) establishing and managing a ‘provider network’ through contracts with providers that specify payment arrangements and provider participation in utilization management activities, (2) paying provider bills for their services, and (3) enforcing coverage limitations. In their contracts with employers, MCOs may assume risk for medical care costs (and purchasers pay ‘premiums’ to MCOs) or purchasers may retain ‘medical risk’ (in which case ‘self-insured’ purchasers pay administrative fees to MCOs for obtaining services). In addition to these ‘basic’ services, MCOs typically offer other programs to purchasers (e.g. related to utilization management or healthy lifestyle management), with program costs being incorporated in premiums or put up for separate payment by purchasers.

Historically, MCOs have responded to purchaser desires to control their health care costs by (1) applying utilization management techniques that cause network providers to substitute less expensive services or sites of care for more expensive ones, (2) negotiating payment arrangements that contain incentives for network providers to control their costs, and (3) simply using their negotiating power to hold down unit prices in provider contracts. At the market level, purchasers also have expected, or at least hoped, that competition among MCOs for their business, or competition among providers for inclusion in MCO networks, would place downward pressure on medical care costs. Some policy analysts have urged purchasers to adopt specific ‘managed competition’ strategies to encourage this ‘cost conscious’ competition on the part of MCOs. However, aggressive pursuit of cost control by MCOs has implications for private sector purchasers. Specifically, depending on how they are carried out, MCOs' cost control efforts have the potential to reduce the value that employees place on their health benefits.

Most employers believe that health benefits are an important part of overall employee compensation, and thus more attractive health benefits can help in employee recruitment and retention, much the same as higher wages. Therefore, in their health benefits strategies, employers attempt to balance the potential benefits of aggressive MCO actions to control costs with the benefits of offering attractive compensation to employees. (Economists generally agree that employees care about overall compensation and thus if employer cost control efforts reduce the value employees place on health benefits, labor market pressures will cause wages to adjust upward in order to compensate for this, with little or no overall gain for employers.) Obviously, conditions in the market for labor affect the importance that employers place on benefit attractiveness versus cost containment; when labor markets are tight, offering attractive benefits becomes more important than when they are soft. In the latter case, employers can support aggressive pursuit of cost containment by MCOs with less risk that any associated reductions in the value of their compensation will cause employees to seek other job opportunities or that the firm will fail to attract new employees. Over time, the types of activities pursued by MCOs, and the aggressiveness with which they are pursued, will reflect the weight that employers place on these two goals for their health benefits programs. And, the most successful MCOs will be ones that can modify their organizational structures, activities, and products effectively in response to changing purchaser demands.

Agency theory provides one conceptual framework for understanding the pressures faced by MCOs and their options for responding to them. MCOs must contract with multiple providers for the delivery of services to MCO members, besides negotiating contracts with purchasers for management of their health benefits. Historically, many MCO contracts with providers have been of the ‘contingent claims’ nature in that the MCO agrees to pay the network provider a specified dollar amount for the delivery of an uncertain amount and mix of services in the future. This uncertainty can relate to the types and number of people who will seek services in some future period and the nature of their medical needs. It is very difficult to arrive at contingent contracts that are satisfactory as it is impossible to anticipate all possible future events, and one party to the contract (e.g. the provider in MCO/provider contracts) may be able to characterize the state of the world, for contract purposes, in a manner that serves its interests. For example, providers may argue that patients require extensive courses of treatment if paid on a fee-for-service basis, or very limited treatment if paid on a price per person per time period (capitated) basis. The MCO may not be able to determine if the provider did the right thing given the condition of the patient, especially if there is no consensus regarding the appropriateness and efficacy of different treatment options.

Using the language of agency theory, in negotiations with network providers the MCO (the ‘principal’) attempts to design contracts with financial incentives that reward the provider (the ‘agent’) for acting in the principal's best interests. However, typical payment approaches in provider contracts (fee for service, capitation) contain relatively strong incentives for behavior that could, at the extreme, be detrimental to the MCO's interests. For example, fee-for-service reimbursement rewards providers for delivering both necessary and unnecessary services to their patients. This could increase costs unnecessarily as well as expose patients to unwarranted medical risks. This being the case, and depending on the information at their disposal, purchasers might seek out MCOs that are able to negotiate provider contracts that minimize these undesirable outcomes. And, MCOs may attempt to incorporate rules and monitoring mechanisms in the contracts with providers that reduce the likelihood of an overaggressive response of the latter to financial incentives. Also, MCOs may seek to mitigate the incentives in ‘pure’ payment approaches such as fee for service by employing other financial rewards in contracts, such as payments for meeting care process goals (e.g. periodic testing for blood sugar among diabetic patients, not prescribing antibiotics for treatment of upper respiratory infections or reducing use of magnetic resonance imaging (MRI) in first visits by patients with lower back pain). In practice, there are many different so-called ‘blended payment’ arrangements accompanying the rules and monitoring mechanisms in the contracts between MCOs and providers.

The type of MCO/provider contract that emerges in any specific situation will depend in part on the competitiveness of the provider market. Where there is relatively little competition among providers (e.g. where provider concentration in a given geographic area is high), they could be expected to negotiate more favorable contractual terms. These could include higher levels of payment for services, an assignment of financial risk that more closely conforms with provider preferences, and/or less obtrusive or objectionable MCO monitoring and oversight of provider activities. In contrast, contracts with terms more favorable to MCOs are more likely where provider markets are competitive, and when excess provider capacity exists. Variations in the contracting environment such as these are likely to lead to a variety of contractual arrangements between MCOs and network providers within the same market as well as across geographic markets. And, contractual arrangements are likely to vary over time as well, being influenced by changes in the structure of the markets for provider services of specific types, the competitiveness of the MCO market, and the preferences of purchasers regarding employee health benefits.

Although MCOs are principals in their contracts with providers, they are agents in their contracts with purchasers. That is, the goal of purchasers is to negotiate contracts with MCOs that lead MCOs to act in the purchaser's best interests. If the actions of MCOs do not promote the interests of purchasers, the MCO risks incurring financial penalties (e.g. the MCO pays for medical care costs above a contract-determined amount) and/or may not have the contract renewed. Different preferences on the part of purchasers in different markets for specific outcomes (e.g. containment of specialist expenditures, avoidance of provider ‘never events,’ managing care for people with specific chronic illnesses) are likely to be reflected in different terms in MCO contracts with providers. Changes in purchaser preferences are likely to precipitate changes in MCO/provider contracts over time.

1 Managed Care

More than any previous event, managed care organizations (or any other system monitoring the utilization and cost of service such as health maintenance organizations, capitated contracts with providers, etc.) are reshaping the practice of psychotherapy (see Managed Care and Psychotherapy in the United States). In the traditional fee-for-service model, decisions about the cost and length of treatment were primarily a function of choices made by the doctor and patient. The allocation of resources (i.e., cost of psychotherapy) was of little concern to the clinician. In fact, the fee-for-service model encourages the provision of service, as more service creates more income. However, in response to the increased costs of psychotherapy, and in particular to the perceived ‘endless’ nature of psychotherapy, managed care organizations are pressuring clinicians to allocate decreasing (less than usual) amounts of service.

While to date, the focus of managed care organizations cost cutting has been almost entirely on limiting the number of sessions a patient receives, ultimately, in order to compete, managed care organizations will have to focus on the quality and efficacy of the psychotherapeutic interventions as well. Managed care organizations are clearly motivated to cut costs. However, they must also satisfy the consumer (i.e., patient), and payor (e.g., employer providing health benefits) and therefore have to balance cost cutting with patient outcome. Simply reducing the length of care will not accomplish this goal, because many, and perhaps the majority, of psychotherapists are trained in ‘long-term’ therapeutic interventions which by nature require more sessions than managed care organizations are willing to allocate. Simply reducing the length of therapies devised to take place over a longer period of time is likely to result in ineffective outcomes, leading both to consumer dissatisfaction and increased costs down the road as the severity of the disorder may increase, becoming less responsive to treatment. Thus, concern for the effectiveness of an intervention will eventually temper the managed care organizations focus on economics. Ultimately, managed care organizations will be interested in clinicians providing the ‘optimal intervention…the least extensive, intensive, intrusive and costly intervention capable of successfully addressing the presenting problem’ (Bennett 1992, p. 203).

Stages of Transformation

Predicting the future of health care may be perilous; however, much can be learned by examining the past. Reece described three “Great Transformations in American Health Care” (Reece, 1988).

The first transformation was the “scientific” one, marked by significant advances such as anesthesia, asepsis, radiology, and intravenous fluids. This was followed by a “social” transformation defined by the advent of health care funding sources in the form of employer provided care (group health and workers' compensation) and government sponsored health care (Medicare and Medicaid). This second transformation, identified by fee-for-service (FFS), led to an open-ended spending policy and, consequently, escalating health care costs. These spiraling costs ushered in the third transformation known as managed care. This third transformation is quickly evolving into a yet unknown fourth transformation. Although a completely new health care paradigm or transformation has not yet fully evolved, there are hints to its components. Growing antimanaged care sentiments reveal less about what this new transformation will include and more about what it will exclude (Clarke, 2000; Millenson, 1998; Paris & Hines, 1995; Savage, et al, 2000).

Control has been methodically wrested from managed care organizations (MCOs) through an array of legislative, litigatory, economic, and consumer-driven mechanisms. One example involves the abolishment of “gag clauses” in managed care contracts, which had prevented physicians and other providers from disclosing to patients information concerning the financial incentives built into managed care contracts. Critics of managed care claim that it does little to actually “manage” the process or outcome of care because it focuses on cost control through at-risk provider contracts, patient co-payments, deductibles, and restricted access to care (Houck, 1997). Managed care's ability to trim perceived and/or real excessive costs from the system has apparently run its course as costs have again begun to spiral out of control. It is estimated that by the year 2008, health expenditures will exceed $2.2 trillion (Smith et al, 1999). These data will lead to innovations in health care finance and delivery. Efficiency and customer value are predicted to supplant managed care's cost fixation. Efficiencies are realized in a mature market through a number of mechanisms:

Expanded use of care extenders

Increased patient responsibility

Evidence-based interventions

Nurse triage via telephonic online client support call centers

Automated office functions

Customized patient educational materials

Collaborative care models

A mature managed care market will see a major transition from a dependent patient model to a more independent patient role (Houck, 1997). Managed care organizations will continue attempts to regain consumer trust that has been seriously eroded over the past decade (Millenson, 1998).

Although it is doubtful that all components of managed care will become extinct, enough may disappear to make it unrecognizable by today's generation. Clearly, new paradigms will emerge and provide rehabilitation providers with both threats and opportunities. Those who view the glass as half full rather than half empty may be the ones who prosper through the next millennium.

2.34.3.4 Infrastructure to Support Evaluation and Analysis

This is the most vulnerable area within managed care organizations and has led to the development of strategic partnerships with academic and research institutions to provide the independence of evaluation and analysis. In the infancy of managed behavioral health care, much of the data was held as proprietary to the organization and not available for independent review. Given the highly competitive nature of the industry, the position was understandable. However, managed care organizations also had difficulty gaining acceptance of their research and evaluation efforts because of the taint of the information being collected for marketing purposes and had not being subjected to peer review processes. Currently the environment is opening up for collaborative approaches to addressing mental health and substance abuse policy issues with federally funded initiatives and through collaboration with research and training institutions.

Obstacles to Managed Medicaid

Medicaid is difficult to manage from an MCO perspective. Typically, MCOs seek to identify a homogeneous population that will respond well to preventive or acute care services. Medicaid covers an extremely heterogeneous population spanning all ages and a multitude of conditions. Managed care attempts to structure benefit programs through a variety of incentives and disincentives. Medicaid has little or no ability to financially reward providers for risk sharing. Managed Medicaid represents a real paradox. Managed care preferences for selective enrollment coupled with the gatekeeper model of restricted access to care (e.g., specialist care) represents the antithesis of Medicaid. Medicaid seeks to be more all-inclusive and to essentially accept enrollees that other plans do not desire.

Managed care plans make use of risk adjustments to manage certain conditions more efficiently. Medicaid currently has inadequate risk adjustment methodologies (Holahan et al, 1998). Last, Medicaid has a poor image that does little to entice managed care participation or provider recruitment (Table 4-9).

Kaiser Permanente Managed Care Organization

Kaiser Permanente (KP) is a managed care organization known for its excellence and integrated care for over 9 million members (Strandberg-Larsen et al., 2010). Of its 37 hospitals, 27 were named as Top Performers by TJC – i.e., 73% of its medical centers (The Joint Commission, 2013). KP is referred to as “integrated” because it provides all patient services, from a primary care physician to hospitalization and pharmacy services. KP has a variety of health plans, from low to high premiums, depending on co-pays (Strandberg-Larsen et al., 2010). KP seems to be highly responsive to the changing political climate of fall 2013. They said in a recent message to members,

If federal and state governments intend to change the health care coverage rules and the composition of federal and state marketplaces in 2014, we hope those changes will be done thoughtfully and with all stakeholders involved, to obtain the best outcome. Our common goal should be to minimize any unintended effects, and avoid – as much as possible – further disruption for individuals and families who are already seeing significant change as a result of health care reform.

We will continue to update our members and customers on how these changes will impact them as the details of this proposal and its implementation become clearer.

(KP.org, 2013).

KP HealthConnect is an integrated electronic health system using electronic medical records (EMRs). KP started HealthConnect in 2004, which documents across all its systems. The EMR also connects the patients to their own records. Furthermore, messages are sent between providers to increase the communication, coordination, and patient-centeredness (see Chapters 2 and 14Chapter 2Chapter 14 for a call for such systems) (Chen et al., 2009).

KP studied other organizations and concluded that there were six proficiencies among top (lean) organizations (Rodak, 2012). These proficiencies were: “leadership alignment, knowledge of the system, measurement of improvement, sharing best practices, training, and involvement of the entire organization” (Rodak, 2012, p. 1). KP used an eclectic approach incorporating lean tools from all methods of improvement. According to Lisa Schilling, RN, MPH, vice president of healthcare performance improvement at Kaiser Permanente, ”We don’t want to teach people a new language around improvement; we want to teach [them] how to focus on designing care around the person so they can bring the tools [they need] to make that care better” (Rodak, 2012, p. 1). KP uses three themes in its approach: learn, apply, and share. KP learns what works and teaches the principles to everyone in the organization, from the bottom to the top. KP used experts in Six Sigma to help them apply “black belt” strategies in their application of quality improvement. Once they found methods that worked, they shared those methods with others in the organization.

Rates

Now it is finally time to review the rates that the MCO has proposed. Based on the knowledge of your practice pattern by modality and source of patients (which referring physicians belong to this plan), you should examine the specific codes or groups of codes by modality to again look for potential trade-offs or compromises should you need to make them. Any payment rules such as bundling will also enter into this. Remember, the goal is not to discuss these issues at the negotiating table but instead to create a mental framework that you always have in mind during the negotiation. For example, if plain radiography is a relatively small part of your practice, you may be willing to accept a lower rate for those procedures if you can increase the CT or MRI rates. The capacity analysis you performed earlier should enter into this process as well. Can you agree to open your mammography practice for more hours to accommodate more of the MCO's members in exchange for higher MRI rates? Perhaps you can accept a lower MRI rate for an enhanced CT payment, if your MRI system is beyond capacity with no room to grow, but your CT system is underused and this new contract could potentially bring in many new CT referrals but few new MRI scans.

The mix of inpatient (professional only) versus outpatient (global) cases should also affect your framework. If the bulk of your revenue comes from a free-standing imaging center where you bill globally, make sure that this gets the priority over the hospital work. Sometimes it is acceptable to have a “loss leader,” that is, a service or location that doesn't really make money and maybe even loses a little but gives you access to a great number of other sources of revenue. For most free-standing imaging practices, plain radiography and mammography are often loss leaders, but this is not always so and may be changing with the recent changes in Medicare payment regulations. Most important is to understand what that loss leader represents and to assure that not all services will fall into that category. It is rare to truly be able to “make it up on volume” if every service does not at least cover its underlying costs.

The PPOs Market Place

Competition in the health care market takes place at different levels. MCOs (and in particular, PPOs) compete to attract enrollees and providers compete for patients and compete to be selected by PPOs. Often, this competition develops in the framework of a regulated market by some public agency aiming at achieving some social welfare goal.

Most of the literature on PPOs deals with the selection of providers, with competition among providers (hospitals and physicians), and with the effects of the design of the insurance contracts on competition. Usually, it is assumed that individuals have already chosen an insurance contract. Some of these individuals may become ill and seek health care services. Sick individuals are referred to as patients. They are the focus of attention of the demand side of the market. Generically, individuals are supposed to make their choices to maximize their level of satisfaction. Focusing the attention on the choice of a PPO, an individual compares on the one hand the premium, co-payment, and deductibles of alternative insurance contracts and on the other hand, the set of in-plan providers. Also, the individual will try to guess how transparent is the information provided by the PPO on medical costs and its negotiation capacity as these are elements characterizing an insurance contract. Also, the individual may consider the plans of the PPOs to enlarge the present set of enrolled providers. All in all, the best plan for an individual reflects the balance between (expected) health care needs, the freedom to choose providers, and his(her) budget constraint. Finally, enrollees should have proper incentives to use the in-plan providers so that the PPOs fulfill their role in the health care system.

In the supply side of the market, one of the reasons for the appearance of MCOs is the need for cost containment in the health care system. As a consequence, managed care has transformed the way hospitals compete for patients and physicians. From competing in quality and provision of services and amenities, managed care introduces the so-called ‘selective contracting’ of providers. This means that not all available providers in a community are able to contract with the managed care plan. Accordingly, hospitals and physicians compete to be selected as in-plan providers. An issue appears on the size of the PPOs. The negotiation between a provider and a PPO to become in-plan determines the discounts that in turn, are linked to expected utilization. Therefore, the PPO faces a dilemma. Limiting the number of providers in-plan favors achieving the utilization levels, and thus the capacity to offer better deals to enrollees. But a too short list of in-plan providers may discourage individuals to contract with the PPO because it limits the freedom to choose. Empirical evidence seems to point to the prevalence of the obtention of lower prices associated with this selective contracting due to the capacity of the managed care plan to control the number of providers and idle capacity. Also, the size of the managed care plan may be an additional element toward lower prices. The selective contracting mechanism has induced a process of integration between providers and insurers. In this integration, we find upstream health providers deciding first the prices charged to the insurers for a bundle of services, and next insurers deciding the premiums of the (menu of) contracts offered to individuals. The interesting finding is that net revenues, upstream or downstream, result from the combination of a competition effect and a coordination effect. The former reflects the impact of downstream competition on upstream providers; the latter captures the efficiency gains from integration. A PPO, by maintaining some separation between providers and insurers, softens premium competition with respect to the other more integrated structures like HMOs. Accordingly, PPOs emerge as more profitable than HMOs, adding an argument to the popularity of PPOs.

Surprisingly enough, there is very little literature on the process of selecting providers and on competition among providers when different reimbursement rules apply, according to the provider chosen by the patient. Generally, patients have to bear part of the cost of the treatment provided by an in-plan care provider. If an out-of-plan care provider is visited instead, the patient pays the full price and obtains the indemnity from the insurer specified in the insurance contract. It should be clear that the setting of the indemnity associated with the out-of-plan provider is a crucial element in the choice of an insurance contract. Three alternatives can be envisaged, capturing three organizations of the health care systems.

The first one simply does not provide coverage for choices outside the preferred provider set. This is called a pure preferred provider system that captures a pure public system of health provision, such as the Spanish one, where a patient visiting a private provider (instead of a public one) has to bear the full cost of the treatment (unless the patient has some duplicate private insurance). The second alternative, labeled fixed co-payment rule, defines an indemnity equal to what the patient would have obtained had she(he) visited a preferred provider (that is the price of the in-plan provider is used as reference price to determine the indemnity). This alternative captures the idea of indemnity based on a reference price inspired by some features of the French system. Also, it captures some important features of the pharmaceutical sector. Finally, the third alternative, the so-called fixed reimbursement rate rule, considers the same co-payment rate on all providers. It is equivalent to the scenario where all providers have been selected by the insurer. This captures some features of the German system, where, together with the public providers, there is a fringe of private providers regulated through bilateral agreements.

There is also an alternative way to endogenously form the PPO. This is the so-called any willing provider mechanism. Under this approach a third-party payer announces a reimbursement rate and the set of health plan conditions. Any provider finding these acceptable is allowed to join the network.

When providers make simultaneous decisions on prices and qualities, this set-up approaches the primary care sector, whereas when decisions are sequential, first (high-cost, long-run decision on) qualities and then (low-cost, short-run decisions on) prices, the set-up approaches the specialized health care sector. When the market is organized around profit-maximizer providers, the fixed-co-payment rule on the primary health care sector is enough to make providers choose the optimal (welfare-maximizing) price and quality levels. In contrast, there is no way to attain such an outcome in the specialized health care sector, unless some regulation is introduced. This issue is discussed next.

Alternatively, the mixed public–private provision of health care and the regulation of the market by a public health authority can also be considered. Two scenarios are envisaged. In the first one, an agency regulates both price and quality of the public provider and acts as a Stackelberg leader whereas private providers are followers. It turns out that the first-mover advantage of the public provider coupled with a fixed co-payment rule are sufficient instruments to achieve the first-best allocation. In the second scenario, regulation takes the form of a three-stage game where the regulator sets the level of quality to maximize welfare, then the private providers decide their quality levels, and finally providers compete in prices in a mixed oligopoly fashion. Now, leadership by direct operation of one provider does not ensure achievement of the social optimum, due to the strategic effects resulting from the sequential nature of the decisions. Comparison of these two ways of modeling the role of a public regulator allows to derive some normative conclusions on the implementation of price controls in the health care systems of some European Union member states. All governments have looked at ways to contain health expenditures. Direct and indirect controls over health care providers have been imposed in some countries where co-payments play an important role. In several countries, controls on prices (pharmaceuticals, per-day treatment in hospitals) exist, whereas in others, no such controls exist. Co-payment changes have been frequent in the European countries, mostly limited to the value of the co-payment, whereas maintaining its structure (fixed reimbursement rates). Moreover, co-payments are designed with insurance coverage in mind (typically, they have an upper limit). No role as a market mechanism underlies the choice of the structure and the value of co-payments. Thus, the relative unsuccessful episodes of cost containment through co-payments is not totally surprising. The structure of the co-payment has been kept constant, although the results reported highlight the fact that changing its structure would have a greater impact.

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