How to make health plans compete on quality.(GUEST EDITORIAL)

Today's health care plans primarily compete on price. In large part, that's because many employers seek to offer the lowest-cost health plans to their employees, which forces the health plans to offer the lowest possible rates. Many physicians and hospitals, in turn, accept reduced fees and payments in order to be the preferred providers of those health insurance plans.

On the other hand, there is relatively little competition among health plans based on quality of care. There are two main reasons for this. The first has to do with adverse risk selection; that is, if a particular health plan were known for its high-quality care, it would likely attract the sickest--and most costly--patients.

The second reason has to do with the economics of our employer-based health insurance system. Employer-paid health insurance has remained popular among workers because it is not taxed as income. If it were, employer-paid health insurance would begin to be less common. In its place, an individual-based health insurance system--in which individuals choose their health insurer in the same manner as they choose an automobile insurer--would begin to grow.

This type of individual insurance market, without the involvement of the employer, would be much more conducive to competition based on quality. Why? High workforce turnover is one important reason.

Researchers have found that, in general, job turnover rates are about 12%-16% per year. When job turnover is high, employers have little incentive to invest in health plans that provide good preventive care and superior treatment, which may result in lower costs later on. That's because future employers are the ones who would reap the benefits of improved ...