On the ideal market structure for third-party purchasing of health care

The ideal market structure would give each medical care organization effective incentives to produce maximum value for money for enrolled subscribers. It should be based on integrated financing and delivery systems--partnerships that link doctors, hospitals and insurers--with per capita prepayment, with providers at risk for cost of care and cost of poor quality, publicly accountable for quality and per capita costs. The ideal market structure must be managed by active intelligent collective purchasing agents, called sponsors, that contract with health care systems and set the rules of competition. Sponsors structure and manage the enrollment process; they create price-elastic demand; they manage risk selection; and they create and administer equitable rules of coverage. Microeconomic theory tells us what sponsors should do to get the market incentives right. There is no comparable political theory to tell us how their boards of directors should be constituted. The paper offers a list of undesirable political arrangements to be avoided and some desirable features of sponsor constitutions.