Social Science & Medicine 54 (2002) 1167–1180

Managed care and the US health care systema social exchange perspective

David E. Grembowskia,*, Karen S. Cookb, Donald L. Patricka,Amy Elizabeth Rousselc

aDepartment of Health Services, University of Washington, Box 357660, Seattle, Washington 98195-7660, USAbDepartment of Sociology, Stanford University, Standford, CA 94305, USA

cHealth 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 theirhealth care systems. However, relatively little is known about how power is organized and exercised in the US healthcare 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 andpatients in the US health care system at three interrelated levels: (1) exchanges between purchasers and managed careorganizations (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 tomove the exchange toward power balance. Collective action is a common strategy at all levels for reducing dependenceand therefore, increasing power in exchange relations. The theoretical and research implications of exchange theory forthe 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 diffusingrapidly 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 controlthem. In the largely private US health care markets, costcontrol is achieved through price competition among

managed care organizations (MCOs) for contractsoffered either by employers or government to deliverhealth care to their covered enrollees. The exportation of

U.S.-style managed care is nowhere more evident than inLatin America and Asian countries, where governmentsare less involved in health care (Bosch 2000; Stocker,Waitzkin, & Iriart, 1999; Azevedo, 1996). With limited

resources and competing, urgent demands for them, thegovernments of these countries are less inclined to createmassive social security systems, but rather are divesting

themselves of public health care systems, and increas-ingly relying on private markets to control health costs.Developing countries also follow this course because

international lending agencies, such as the World Bankand US AID, often stipulate that countries move towardprivate 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 greatdegree, competitive markets for health care are irrele-

vant to European and other industrialized countries that

*Corresponding author. Tel.: +1-206-616-2921; fax: +1-

206-543-3964.

E-mail address: grem@u.washington.edu (D.E. Grembow-

ski).

0277-9536/02/$ - see front matter # 2002 Elsevier Science Ltd. All rights reserved.

PII: S 0 2 7 7 - 9 5 3 6 ( 0 1 ) 0 0 0 8 7 - 9

have national health insurance systems or nationalhealth services (Light, 2000; Mechanic & Rochefort,

1996). Furthermore, these countries already have costcontrols}central budgeting, fee regulation, controls onthe introduction and diffusion of technology, manpower

policies limiting the number and types of healthprofessionals, and so forth}that perform better thanmanaged care and price competition (Mechanic &Rochefort, 1996; Azevedo, 1996; Reinhardt, 1996).

What managed care does offer is new ideas and methodsfor improving system performance–such as makingproviders accountable for their performance by linking

their productivity to payment, introducing greaterchoice of providers into ‘‘no-choice’’ public systems,and promoting the integration of health and social

services}that countries can adopt selectively to reformtheir health care systems (Light, 2000; Azevedo, 1996).These global trends provide evidence that health care

systems are converging, or becoming more similar overtime. Initially raised by Mechanic in 1975, the‘‘convergence hypothesis’’ posits that integrated worldeconomies, rapid diffusion of technology and scientific

information, rapid mass communication, and othermacro forces create a ‘‘world culture’’ of medicine,where nations face similar problems and adopt similar

policies to solve them, but adjust the policies to meettheir own circumstances and cultural traditions (White-ford & Nixon, 2000; Mechanic & Rochefort, 1996;

Kirkman–Liff, 1994). The world-wide problem ofescalating costs and the widespread turn toward privatemarkets and managed care to control them is a part ofthis convergence.

The convergence toward private markets or selectedfeatures of managed care are important given 40 years ofinternational experience that private markets result in

inequity, inefficiency, higher costs, and public dissatis-faction (Evans, 1997). Given this alarming track record,why is price competition favored in the US and other

countries? Evans (1997) provides one answer: pricecompetition and managed care serve the over-lapping,narrow economic interests of powerful groups in society

} the buyers of health care (mainly employers andgovernment), suppliers of medical goods, managed careorganizations, and upper-income citizens } who allbenefit financially from the economic arrangement of

private markets. With more and more countries turningtoward private markets and managed care to solve theircost problems, this evidence calls for a greater socio-

logical understanding of how power is organized andexercised in private markets.To close this knowledge gap, our purpose is to apply

social exchange theory to examine the power relationsbetween purchasers, managed care organizations, pro-viders and patients in the US health care system. We

begin with a brief history of the growth of managed careand 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 weredominated by purchasers and managed care organiza-tions. Then, we review evidence indicating that the

imbalanced relations gradually are becoming morebalanced, a trend that is consistent with exchangetheory. We conclude with a discussion of our findingsand their implications for research and health policy.

Managed care and price competition as social exchange

Following World War II, America’s health enterpriseentered 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 passivelyreimbursed whatever physicians and other individual

and organizational providers charged. In this ‘‘GoldenAge’’ of American medicine, physicians largely con-trolled the health care system and practiced theirprofession 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 healthcare programs were launched, providing greater accessto health care among virtually all population groups

(Davis & Schoen, 1978). As technology improved andthe number of Americans with some form of employer-paid health insurance increased substantially, so did theutilization and the cost of care. In response to demand

and raising costs, employers and other purchaserstransformed themselves from passive ‘‘price-takers’’under fee-for-service reimbursement to active ‘‘price-

setters,’’ where plans compete on the basis of price fortheir contracts (Light, 1991; Robinson, 1995). Tocontrol their financial risks, MCOs favor contracts

containing healthy and wealthy people who will likelyhave lower health costs in the future, while contractsoffering similar resources for sicker and lower-income

people are avoided.Many analysts agree that employers, federal and state

governments, and other purchasers dominate andlargely govern the flow of resources in today’s market-

based health system (Robert Wood Johnson Founda-tion, 1995). From a sociological perspective, ‘‘managedcare’’ is fundamentally a shift in power and control of

the health care system’s from physicians to organiza-tional 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),

D.E. Grembowski et al. / Social Science & Medicine 54 (2002) 1167–11801168

and health maintenance organizations (HMOs; defini-tions are presented in the Appendix).

While this transformation is well-documented, less isknown about the nature of the power relations betweenpurchasers, managed care organizations, providers and

patients and the implications of these relations forchange. Our purpose is to examine these relations morefully from an exchange perspective. Exchange theorywas developed originally by Blau (1964), Homans

(1958,1961), and Thibaut and Kelley (1959) primarilyto explain social relations among individuals.1 Buildingon their work, Emerson (1962,1972a,1976) developed

the concepts of power and dependence in exchangerelations more fully and applied them to social net-works. Previous investigators have used social exchange

theory to explain behavior in various sectors of thehealth 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 especiallythe work of Homans and Thibaut and Kelly), or they

can be viewed as connected to form networks ofexchange (Emerson, 1972b; Cook and Emerson, 1978;Molm & Cook, 1995). Power dynamics operate at both

levels, within the dyadic domain and within networks. InEmerson’s terms, power in exchange relations ornetworks is based upon the dependence of the actorson one another for resources of value. These resources

can be instrumental involving economic or social goodsand services, as well as purely symbolic, as in a brandname or reputation. Interdependence and specialization

create the necessity for exchange, and all organizationsadopt a wide variety of strategies for coping with thisinterdependence.2

Building on Emerson’s theory and Gold, Nelson,Lake, Hurley and Berenson’s (1995) systems } ex-change framework, we define the US health care system

as a complex network of exchange relations amongindividuals and organizations pursuing their own goalsand interests in the delivery or financing of healthservices. For social exchange theorists, key features of

exchange relations and networks are the power of theactors involved and the strategies they employ to

enhance their power in the exchange domains they careabout. In the next section we examine these features ofexchange 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, webegin with a simple exchange model of the system

illustrating relationships between the major organiza-tions and providers (see Fig. 1). For simplicity, themodel includes only three levels of interconnectedexchange under managed care: (1) the macro-level of

exchange between organizational purchasers and man-aged care organizations; (2) a middle-level of exchangebetween 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 healthdepartments, voluntary associations and other organiza-tions. We focus on exchange relations among purcha-

sers, MCOs, physicians and patients in an effort toexplain the historical shift in power from physicians topurchasers and MCOs, and because these four groupsare often the focus of health policy debates.

Fig. 1 depicts exchange relations favoring purchasersand MCOs, with government essentially delegatingmuch 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 officialsbecause of the market’s success in controlling health

costs, which means that government dollars saved onhealth care can be devoted to other sectors, and elected

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

1Blau (1964) also tried to link exchange processes at the

micro-level with macro-level processes in organizations and

larger social systems.2Much 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.

D.E. Grembowski et al. / Social Science & Medicine 54 (2002) 1167–1180 1169

officials can avoid the thorny political problems thatwould inevitably rise if government assumed this role.

At the micro-level of the model, we assume that apatient has resources to exchange for health carethrough 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 healthinsurance (Kilborn, 1998). When people who want

health care but have no money or insurance to pay forit, they have less resources to exchange for health careand therefore, have even less power in the health care

system than people with insurance and higher incomes(Reinhardt, 1996). For uninsured Americans with lowincomes, the end result is greater dependence on charity

care from public hospitals and clinics, inequitable accessto health care, and harmful health outcomes (Stein-hauer, 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 thefinancing and the delivery of health services, while

MCOs are dependent on purchasers for a population ofenrollees and therefore, revenue.3 The dependence ofMCOs on purchasers increases with the value of the

benefits that purchasers can provide to MCOs anddecreases with MCOs’ access to alternative sources ofthose benefits (Cook, 1977). Thus, the dependence of anMCO on purchasing organizations will decrease if there

are multiple purchasers of its services. In contrast, asingle purchaser will increase the MCO’s dependence.Dependence is a source of power in exchange

relations. The greater the dependence of the MCO onthe purchaser, the greater is the power of the purchaserover the MCO (Theorem 4 in Emerson, 1972b).

Conversely, MCOs have a power advantage if they areless dependent in the exchange relation, or if thepurchaser is dependent on the MCO. Unequal power-

dependence relations, where one party has a poweradvantage over the other actor, typically result inimbalanced exchange, where outcomes usually favor

the less dependent, or more powerful, party (Emerson,1962; Molm & Cook, 1995). In contrast, equal power-

dependence relations are characterized by balancedexchange, where both parties benefit mutually from theexchange. Defined in this way, power is not a personal

or organizational attribute but rather results from thestructural relations between purchasers and MCOs andthe networks in which they are embedded (Molm &Cook, 1995).

Emerson has argued that, in general, exchangerelations tend to move toward balance: the greater theimbalance of a purchaser–MCO exchange at one point

in time, the more likely it will move toward balance at alater point in time (Theorem 5 in Emerson, 1972b). Forexample, if a purchaser is less dependent in the

exchange, a purchaser may use its power advantage togain more rewards from the MCO (Corollary 1.3 inEmerson, 1972b). This action actually increases the

dependence of the purchaser on the MCO whiledecreasing the dependence of the MCO on thepurchaser, moving the relation toward greater equalityof power. Put another way, often the use of power

paradoxically results in a loss of power over time. Thepredictable shift from power-imbalanced toward powerbalanced exchange is determined primarily by the

structure of the relations, not necessarily the intentionsof individuals to gain more from the exchange (Molm &Cook, 1995).

Like all exchange relations, purchaser–MCO relationsmay move toward a balance of power through any oneor a combination of four ‘‘power-balancing operations’’(Emerson, 1962,1972b). If a purchaser holds a power

advantage, change toward a more balanced distributionof power may occur by the MCO’s withdrawal from theexchange (the value of the purchaser’s resources declines

for the MCO), status giving (the value of the purchaser’sresources increases for the MCO), network extension (anincrease in alternative purchasers for the MCO), or

coalition formation (a decrease in alternative MCOs forthe purchaser, for example, through MCO mergers).Because the latter two strategies involve changes in the

network of exchange relations, they are importantconcepts for explaining changes in the structure ofpower and dependence in the health care system.The operations also can increase imbalanced ex-

change. For example, coalition formation in most anyform enhances bargaining power, regardless of whetherthe organizations were formerly weak or strong (Cook &

Emerson, 1984). At the macro-level in Fig. 1, manyemployers and other purchasers, faced with higher costs(premiums) for health care, have formed coalitions to

achieve a power advantage in their exchange relationswith MCOs. By having a power advantage, largepurchasing coalitions can dictate the terms of the

exchange. Perhaps the best-known example is CalPERS(California Public Employees’ Retirement System), the

3Capitation 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. Accord-

ing 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).

D.E. Grembowski et al. / Social Science & Medicine 54 (2002) 1167–11801170

purchasing alliance for over 900,000 employees in 877state and local governments in California (US General

Accounting Office, 1993). In an unprecedented displayof market clout, CalPERS achieved 0.4–5.3 percentreductions in health insurance costs in each year

between, 1993 and 1995 (Bodenheimer & Sullivan,1998). The reductions are impressive, given that employ-er health care costs increased 17–19 percent each yearbetween 1988 and 1990. Today, the evidence clearly

indicates that organizational purchasers largely controlpremiums and therefore, the cost of health care (HealthTracking, 1995). This pattern indicates that Emerson’s

‘‘power-balancing’’ operations can be viewed moresimply as ‘‘power-gaining’’ strategies which vary de-pending on the structural location of the actor (or the

level of the actor’s power). More powerful actors willattempt to preserve power, while those at a powerdisadvantage will attempt to gain power.

Because power is a function of resource-dependence inexchange relations, the common objective of organiza-tions and individuals at all three levels is to avoid beingcontrolled by, or dependent on, others (Cook, 1977;

Oliver, 1991; Nystrom & Starbuck, 1981). Just aspurchasers have used coalition formation to gain poweradvantages, so have MCOs responded in similar

fashion, merging, consolidating, and forming alliancesor other types of coalitions to reduce their dependence intheir exchange relations with purchasers (Magel, 1999;

Zelman, 1996; Kaluzny, Zuckerman, & Ricketts, 1995;Shactman & Altman, 1995).4 These may be voluntaryand mutually protective coalitions designed to maintainexisting resources and reduce the power advantage of

purchasers over MCOs, such as the recent merger ofGroup Health Cooperative of Puget Sound and KaiserPermanente in the Pacific Northwest of the US (Kuttner,

1998). MCOs, hospitals and other organizations alsomay enter into predatory coalitions to acquire new

resources, achieve a competitive advantage over otherorganizations, and improve market share. A primeexample is the Columbia/HCA for-profit hospital chain,

which expanded from 95 hospitals in 1994 to over 300hospitals a year later (Zelman, 1996).MCO mergers may reduce competition in local

markets, raising possible violations of antitrust legisla-

tion (Feldman, Wholey, & Christianson, 1999; Boden-heimer & Sullivan, 1998; Shactman & Altman, 1995). Ifthe power advantage of MCOs approaches a monopoly

in local markets, it may be used unfairly to extract priceconcessions from both physicians and from purchasers,which may be retained as profits instead of used to lower

premium costs. In response, government antitrustactivity aimed at MCOs might occur in the future(Shactman & Altman, 1995), or purchasers may reduce

their dependence on MCOs by direct contracting withproviders, which is a type of balancing operation(network extension), that increases the number ofgroups competing for their contracts (Bodenheimer &

Sullivan, 1998).

Middle-level exchange between MCOs and physicians

Coalition formation by purchasers and MCOs at themacro-level has produced an imbalanced MCO–physi-

cian exchange favoring MCOs at the middle-level. Anoversupply of physicians in most urban areas alsoaccounts partly for the greater dependence of physicians

in their exchange relations with MCOs and theirmanagers (Tarlov, 1988; Terris, 1998). To control costs,MCOs have used their power advantage by developingprovider networks}the single, common element of

MCOs and the essential mechanism for controlling theircosts (Miller & Luft, 1994; Reinhardt, 1996)}composedof physicians with lower-cost practice styles, and by

placing restrictions on patient access to providersoutside their networks. In areas where an oversupplyof physicians exists, physicians exchange the competitive

advantage of securing patients from the MCO foradministrative controls over their clinical autonomyand income (Grembowski et al., 1998). In short, as

physician supply has grown, so has physician depen-dence on MCOs for employment and a steady supply ofpatients, 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 throughfinancial incentives, provider networks, and utilization

management (Grembowski et al., 1998). Financialincentives include whether the health plan is capitation

4Consolidation or coalition formation is only one form of

alliance, and different types of alliances use different govern-

ance 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 transac-

tion costs under conditions of uncertainty, as well as coordina-

tion 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).

D.E. Grembowski et al. / Social Science & Medicine 54 (2002) 1167–1180 1171

or fee-for-service, how the physician is paid, andwhether the physician receives a bonus or has a financial

withhold for referrals. Provider networks can controlcosts by building networks with lower utilization rates,limiting the size of the network, or installing primary

care physicians as gatekeepers to specialty care. If aMCO invites a physician to join its network, the MCOmay use its clout and force physicians to eitherparticipate in all of its health insurance plans or none

at all (American Health Line, March 15, 1999a).Utilization management captures preauthorization re-quirements for referrals to specialists and hospital care.

Other things equal, as the number and strength of anMCO’s controls increase, so does the intensity, or‘‘managedness,’’ of managed care.

MCOs would not be able to influence physicianbehavior without the tools for doing so. The trendtoward ‘‘outcomes management’’}a broad term that

includes disease management, clinical guidelines andpathways, evidence-based medicine, and cost-effectivecare–provides an array of tools for justifying treatmentrestrictions based on outcomes as well as cost, and

removing control of decision making from individualdoctors. This pattern is captured by the ‘‘I=T ratio,’’ aconcept developed by Jamous and Peloille (1970) three

decades ago in their study of university–hospitalrelations in France (Coburn & Willis, 2000). The basicassumption of the ratio is that professional practice of

medicine can be divided into two parts: (1) the ‘‘art’’ orpractice of medicine (indetermination) that is not basedon well-defined rules and therefore is less reproducibleacross clinical settings; and (2) the knowledge of

medicine based on science (technicality) that is basedon well-defined rules that are reproducible acrosssettings. The lower the I=T ratio, the more physicians

are open to the rationalization and routinization of theirwork. Developed by clinical epidemiologists, economistsand others, clinical guidelines and other forms of

evidence-based medicine lower the I=T ratio byincreasing technicality while reducing indetermination(Coburn & Willis, 2000). As a consequence, physician

control over medical knowledge is undermined, whichreduces their power in exchange relations with MCOsand 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 medicineby developing performance standards based on treat-

ments delivered to thousands of patients, profilingphysicians’ treatment patterns, and identifying physi-cians that deviate significantly from the standard.

Information systems also support utilization manage-ment, where physicians’ recommended treatments mustbe preauthorized by the MCO } based on the evidence

} before it will pay for them. In contrast, physiciansoften lack comparable information resources and are,

therefore, ill-equipped to contest MCO treatmentprotocols derived from MCO data bases (Beckham,

1998). The usual result is imbalanced informationexchange and therefore, treatment protocols favoringMCOs.

Micro-level exchange between physicians and patients

In the doctor–patient relationship, health services areprovided through an exchange process (Grembowski,Anderson, & Chen, 1989). The patient is dependent on

the physician’s knowledge and competence for restoringor maintaining health. Similarly, the physician isdependent on the patient for income, new patient

referrals, as well as less tangible rewards, such ascompliance, praise and appreciation. Information givingalso affects the balance of power in the doctor–patient

relationship: the more information that physiciansprovide to patients, the less dependent is the patienton the physician, and the more balanced is the relation-

ship (Grembowski et al., 1989). In studies conductedbefore the era of managed care, the evidence indicatesthat physicians dominated the relationship and largelydetermined the treatment patients received (Freidson,

1988; Starr, 1982; Dranove & White, 1987). Mostpatients regarded this power as legitimate and generallydeferred to the physician’s judgement.

In imbalanced physician–patient exchanges, the de-gree of trust influences the shift toward balance and mayreduce the physician’s actual use of power in the

exchange (Turner, 1987; Molm, 1987). From anexchange perspective, trust enhances social responsibil-ity in long-term patient–provider relationships (Emer-son, 1976; Meeker, 1971). Because doctors have medical

expertise and the authority to define patient needs, thepotential for physician exploitation and patient distrustexists in their exchange relations, especially in brief or

one-time-only encounters. In response, legal and ethicalnorms and expectations exist to establish the patient’swelfare}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 lessneed to protect his or her own interests in the relation.As a consequence, patient uncertainty}and, therefore,

dependency}is reduced, moving the relationship to-ward balance, which ultimately may produce betteroutcomes of care (Davies & Rundall, 2000). In contrast,

in imbalanced relations (where outcomes favor the lessdependent, or more powerful, party), exploitation anderosion of trust may result in the patient’s withdrawal

from the relationship, which also balances the exchange(Molm & Cook, 1995; Emerson, 1972b).

D.E. Grembowski et al. / Social Science & Medicine 54 (2002) 1167–11801172

Exchange relations at the macro-level can affectthe doctor–patient relationship at the micro-level

in either a beneficial or harmful manner. Employerscontract with MCOs to provide care to employeesand their dependents. When an employer establishes

and maintains a MCO contract over a number ofyears, the long-term employer–MCO relation increasesthe likelihood that doctors and patients canestablish long-term relations at the micro-level, which

can contribute to better continuity and outcomes ofcare, assuming that physician–MCO relations alsoremain stable. In contrast, if a purchaser terminates

its health care arrangements to contract with a new,less costly MCO, the change increases the odds thatdoctor–patient relationships will be disrupted at

the micro-level, reducing the continuity and potentiallythe quality of care (Carrasquillo, Himmelstein &Woolhandler, 1998; Flocke, Strange, & Zyanski,

1997). Perhaps the best-known example occurred in1988 when Allied-Signal Corporation saved millions inhealth care premiums by abruptly canceling its healthcare 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 theMCOs are the source of the disruption in patient–physician relationships. Faced with financial setbacks

and escalating costs, some MCOs have abandoned theirMedicare HMO plans, leaving their Medicare patientswith few options but to enroll in the standard Medicareplan and pay more out-of-pocket for supplemental

insurance (Morrow, 1998). In short, private purchasersand MCOs can withdraw from or modify their exchangerelations when the costs of the exchange exceed its

rewards, which may disrupt care or leave their employ-ees and dependents uninsured (Bodenheimer & Sullivan,1998).

At the middle-level, exchange relations betweenMCOs and physicians also can affect doctor–patientrelations in either a beneficial or harmful manner.

Socially oriented, nonprofit HMOs typically emphasizeprevention and cost-effective treatments, and theirphysicians are monitored regularly to promote ‘‘bestpractice’’ medicine (Kuttner, 1998). For example, Group

Health Cooperative of Puget Sound is a national leaderin integrated case management and is creating innova-tive models for managing patients with chronic illness

which shift power to patients in the patient–providerexchange (Kuttner, 1998; Wagner, 1998). Such efforts toimprove care can build patient loyalty and trust in the

organization, which may have a beneficial influence oncontinuity of care and doctor–patient relations at themicro-level. Achieving these benefits, however, requires

physician networks with little turnover, which candisrupt physician–patient relationships and coordina-

tion of care, and lower turnover may be more likely instaff-model MCOs like Group Health.

In contrast, market-oriented MCOs have morestringent preauthorization systems to approve or denycare, and impose greater financial incentives on physi-

cians to withhold or limit care (Kuttner, 1998).Mounting evidence suggests that such practices at themiddle-level may be eroding trust and harming thePhysician–patient exchange at the micro-level (Larson,

1996; Mechanic, 1996, 1998; Mechanic & Schlesinger,1996). At the macro-level, when purchasers gain cloutand become price-setters, MCOs become price-takers

and must develop effective mechanisms to control theircosts, such as building a network of physicians withlower rates of utilization and costs. By being part of the

MCO’s network, the primary care physician’s role canshift from patient advocate to allocator of higher costspecialty services in the MCO’s network (Gray, 1991;

Mechanic, 1994). In the past, some MCOs createdincentives or policies to discourage physicians fromeither disclosing fully all treatment options to patients orgranting access to those treatments (Woolhandler &

Himmelstein, 1995; Kassirer, 1995; Mechanic, 1994),creating a conflict of interest that can influence thepower balance in the doctor–patient relationship (Ema-

nuel & Dubler, 1995; Shortell et al., 1998).5 In terms ofexchange theory, the physician’s dilemma is decidingwhether the value of rewards in the MCO–physician

exchange outweighs the value of rewards in his or herrelations with patients. When these incentives exist andthe MCO–physician exchange prevails, patient warinessmay replace trust (Kolata, 1990), imbalancing the

exchange and increasing the potential for patientdissatisfaction, withdrawal from the relationship (a typeof balancing operation), and searching for a new

physician (a form of network extension that balancesthe exchange).

Moving from imbalanced toward more balanced exchange

relations

Social exchange theory predicts that the imbalancedexchange relations described in the previous sectionwould gradually shift toward more balanced relations

over time. In this section, we review the evidenceindicating that the US health care system is moving inthis direction. Light (1991, 2000) uses the concept of‘‘countervailing power’’ to describe the historical,

behavioral cycle where one party accumulates such

5Physicians 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).

D.E. Grembowski et al. / Social Science & Medicine 54 (2002) 1167–1180 1173

power that other parties react by increasing their effortsto 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 thanprice-takers. However, current forecasts indicate thatMCOs will experience double-digit rate increases in2000, suggesting purchaser–MCO relations are moving

toward balance (Rundle, 1999). CalPERS, the nation’ssecond largest health care purchaser, has approved anaverage 9.7% rate increase to MCOs providing care to

its members (Rundle, 1999). The trend toward balanceat the purchaser–MCO level is promoted by similartrends in the other levels of Fig. 1.

Middle-level exchange relations between MCOs and

physicians

Just as coalition formation was the primary mechan-

ism for moving purchaser–MCO relations towardsbalance, coalition formation also is a common mechan-ism for doing so in MCO–physician relations. Physiciansand other providers are forming unions, which decrease

the number of alternative sources of care for the MCOsto contract with, and this moves the MCO–physicianexchange toward a balance of power (Leib, 2000;

Greenhouse, 1999; Beason, 1998; American HealthLine, 1998c,d). Physicians of all types are forming large,single- or multi-specialty group practices and physician-

run networks to increase their clout in negotiations withMCOs or to bid against MCOs for contracts frompurchasers (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 directlywith large physician groups (Bodenheimer & Sullivan,

1998; Health Tracking, 1995), the middle exchange

between MCOs and physicians (see Fig. 1) movestoward balance through two balancing operations,

withdrawal (physicians’ termination of at least someMCO relations) and network extension (physiciangroups contracting directly with purchasers).

In a similar way, the so-called ‘‘any willing provider’’laws, which require MCOs to open their networks to anyprovider who wants to join, also would lead to greaterpower balance in the MCO–physician exchange. Recall

that provider networks are the common element ofMCOs and are critical for controlling utilization andcosts. Any legislation that undermines MCO control of

their networks largely undermines their power advan-tage in their exchanges with providers. It is notsurprising that MCOs, as well as large purchasers who

also favor cost control, strongly oppose such state orfederal legislation (American Health Line, 1998a).In some cases, physicians are balancing their ex-

changes with MCOs by withdrawing from their relation-ships (Marquis, 1999; Steinhauer, 1999a). Somephysicians are dropping plans with the lowest reimbur-sement rates or the most administrative hassles. Others

are taking more extreme measures by moving theirpractices to markets with low penetration of managedcare, 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). Mill-

man and Robertson, a world-wide consulting firm, hasdeveloped money-saving clinical guidelines for healthcare that are widely used by MCOs. A recent, physician-led lawsuit is challenging the guidelines partly because

they may harm the health outcomes of children.Unrelated class-action lawsuits against health insurersin New Jersey and Florida also attack MCOs for relying

too heavily on the Millman and Robertson guidelinesfor managing care. In terms of the I=T ratio describedearlier, efforts to reduce MCO reliance on clinical

guidelines reduces the technicality dimension of theratio, 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 dependenceon MCOs by greatly increasing the percentage ofphysicians who are members of the American Medical

Association (a type of coalition formation), which isabout 35% (source: American Medical Association). Inprinciple, national and state medical associations with

more physicians might have more clout in framing theterms of physician–MCO contracts across jurisdictionsthan associations with fewer physicians. Alternatively,

as a long-term strategy the oversupply of physicianscould be reduced, which would decrease the number ofalternative sources of care for MCOs and move the

MCO–physician exchange toward balance. We may notobserve these strategies because physicians}and the

6In 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.

D.E. Grembowski et al. / Social Science & Medicine 54 (2002) 1167–11801174

medical schools which produce them}are not a homo-genous group and consequently, do not behave in a

similar manner. Indeed, many of the people runningMCOs and their utilization control and financialincentive systems are themselves physicians (Kuttner,

1998). Over the past decade medical schools havemaintained rather than decreased admission rates, andare graduating more primary care physicians to satisfythe personnel demands of MCOs (Jolly & Hudley,

1997).

Micro-level exchange between physicians and patients

Patients typically have imbalanced exchange relationswith physicians and MCOs. Patient–physician exchange

is imbalanced because of the patient’s dependence onmedical knowledge of the physician. Today, however,the widespread, daily dissemination of health informa-

tion to the public can reduce patient dependence in theirexchange relations with physicians as well as MCOs. Forthe ‘‘activated’’ patient, access to more information

about alternative treatments and sources of care throughthe press and the Web can reduce the patient’suncertainty and consequently, promote more balancedrelations with physicians and their MCOs. Similarly,

patients can reduce their dependence on physicians byseeking care from ‘‘alternative’’ medical providers, suchas 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 dis-satisfaction and the erosion of trust are widespread(Bodenheimer, 1996; Church, 1997; Duff, 1998). In onenational poll, adults were asked to rate 11 high-profile

industries based on service to consumers, and MCOswere ranked at the very bottom along with tobaccocompanies (American Health Line, April 28, 1999b). In

other national polls, 86% of respondents said MCOswere more concerned with cost containment thanproviding quality care (Duff, 1998), and 60% favored

tougher government regulation of MCOs (AmericanHealth Line, 1998e). In response, 46 states and theDistrict of Columbia have passed measures to regulate

MCOs (Kuttner, 1998). Several states and the federalgovernment have approved ‘‘anti-gag clause’’ legislationdesigned to prohibit MCOs from curtailing physicians’rights to talk openly about all treatment options with

their patients (Gray, 1996). Many policy makers andinterest groups are calling for a ‘‘sweeping patients’ billof rights,’’ including the right to sue one’s HMO, in

response to growing public distrust and dissatisfactionwith MCOs (Mechanic, 1997; Kilborn, 1998). Indeed, in1999 California passed legislation that allowed enrollees

to sue their HMOs and seek second opinions andexternal review for treatment grievances, created a new

state Department of Managed Care to monitor HMOsand perform patient advocacy, and installed other

changes (Shinkman, 1999). Similar legislation is beingconsidered by Congress. Purchasers and MCOs gener-ally oppose such measures (Kilborn, 1998), and many

purchasers, though still concerned with costs, seek toprovide better quality of health care to avoidmore intrusive regulations in the future (Freudenheim,1998).

As a whole, these counterbalancing efforts, as well asthe economic expansion of the 1990s, are currentlymoving the imbalanced relations in Fig. 1 toward

balance. Recall that many purchasers of health coverageare employers, and employers also have exchangerelations with their employees. As the 1990s economic

expansion accelerated and labor markets tightened inthe US, employer dependence on employees increased.Consequently, employers and MCOs are responding to

employee concerns about MCO restrictions by offeringemployees more choice (Martinez, 2001; Winslow &McGinley, 2001), for example, by allowing enrollees toseek care outside MCO networks, usually at additional

cost although a referral from a primary care physicianmay still be required (Bodenheimer, 1999), by expandingthe network and benefits to include different types of

providers (such as social workers, acupuncturists orother alternative providers), or by increasing the numberof plans offered to employees. In particular, United-

Health Group, which insures 14.5 million people,recently announced that doctors in its network canmake clinical decisions without the Group’s pre-approval, a long-standing source of frustration for both

doctors and patients (Freudenheim, 1999). Thesesteps reduce patient dependence in their relationswith employers, MCOs and physicians, but they

still miss the root of the managed care backlash, thefear that a MCO will deny or limit care when a personbecomes 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 canimpose laws and regulations that either support orhinder employers, MCOs, physicians and patients inpursuing their interests. Historically, the federal HMO

Act of 1973 and ERISA (the Employee RetirementIncome and Security Act) have encouraged the growthof HMOs and protected self-insured employer plans

from litigation (Kuttner, 1998). However, recall thatelected 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 formore government regulation of MCOs, elected officials

may approve such measures in exchange for possiblevoter support at the next election (Hunt, 1998). In short,

D.E. Grembowski et al. / Social Science & Medicine 54 (2002) 1167–1180 1175

while patients may have the greatest dependence andtherefore, the least power of all actors in Fig. 1,

government may impose laws and regulations that movepatients’ exchange relations with physicians and MCOstoward balance.

Summary

Exchange relations in the US health care systemcreate ties of mutual dependence. Fig. 1 depicts a‘‘chain of power and dependence’’ in the health care

system, where purchasers hold a power advantage overMCOs, 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 ofpower in the model. In the early days of managed careand price competition, purchasers largely controlledeconomic exchange in the health care system, and

physician control has been diluted significantlythrough controls imposed by MCOs (Etheredge et al.,1996).

The common objective in all of these relations is toavoid 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 analysisindicates 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 anequilibrium state (Emerson, 1972b). The US healthsystem 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 power-balancing mechanisms, which in turn create further

changes in the network. Over time, these changes alterthe distribution of power among the individuals, groupsand organizations in the network.7

Theoretical and research implications

Our goal was to apply social exchange theory toexamine 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 othercountries. For example, Light (1991,1997) describes thetransformation of the United Kingdom’s NationalHealth System (NHS) from a nationally administered

delivery system into a network of competitive contracts.Beginning in 1989, the government remained the majorsource of public funds for health services and allocated

funds to two types of purchasers: (1) regional anddistrict health authorities of the NHS, which offeredcontracts 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), whoprovided primary care and purchased elective specialty

services. Sellers consisted of specialists, hospitals andcommunity services, who competed for contracts offeredby the purchasers. Planned exchange relations betweenthe 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 thepurchasers to engage in competitive contracting. Be-cause the dependence of the purchasers on the govern-

ment is greater than vice versa, the government has apower advantage in the exchange. Similarly, the sellersof health services are dependent on the purchasers forrevenue (line B), and purchasers have a power advantage

in the exchange with sellers. Compared to the formersystem, sellers would have more freedom to developtheir 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 purcha-

sers and would go out of business. Fearing the politicalrepercussions of bankrupt hospitals and disruptedservices under competitive contracting, the government

Fig. 2. A simple exchange model of competitive contracting in

the United Kingdom (1989).

7Recently, 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.

D.E. Grembowski et al. / Social Science & Medicine 54 (2002) 1167–11801176

replaced market competition with ‘‘dictated’’competition’’ by intensively regulating purchaser–seller

relations. In exchange relations between governmentand purchasers (line A), government controlled con-tracting to preserve previous funding patterns. The

government also entered into exchange relations withsellers (line C) and used its power advantage in theexchange to control prices, limit borrowing and gen-erally manage the financial practices of sellers. In short,

the government managed the exchange relations, orcontracting, between purchasers and sellers (line B)through its exchange relations with each party (lines A

and C). By exercising its power advantage overpurchasers and sellers, the exchange relation betweenpurchasers and sellers (line B) moved toward balance.

By 1993, ‘‘managed competition’’ was replaced by‘‘managed cooperation,’’ where purchasers and sellerswork collaboratively to allocate funds through needs-

based budgets. Laws and regulations were revised tosupport the change, and by 1996 the NHS was placingrenewed emphasis on various forms of cooperativepurchasing, 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 exercisedwithin them. A comparison of the US and British healthcare systems suggests that variation exists in exchange

relations across countries. Further comparative researchof health care systems is recommended to understandthe variation in the exchange–power relations acrosscountries and factors that influence them. For example,

the British experience suggests that in national systemsof health care, governments can have a power advan-tage, and the use of this power advantage may be an

important factor explaining variation in exchangerelations across national systems. In contrast, countrieswith private markets may have different forms of

managed competition, which may lead to differentpower structures with different balanced–imbalancedexchange relations. The exportation of US-style mana-

ged care to other countries provides opportunities forexamining exchange relations in emerging, market-basedhealth care systems, and whether their exchange rela-tions are similar or different than those observed in the

US. Over time, the comparative findings from publicand private health care systems would accumulate andeventually might lead to an exchange-based theory

explaining the power structures of health care systemsand their implications for system performance.

Acknowledgements

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

AHCPR) Grant No. HS06833 and the Robert WoodJohnson Foundation Grant No. 036448.

Appendix . Major types of managed care organizations in

the united states

PPO (Preferred Provider Organization): A health planwith a network of providers whose services are availableto enrollees at lower cost than the services of non-

network providers. PPO enrollees may self-refer to anynetwork provider at any time.

POS (Point-of-Service Plan): A managed care plan

that combines features of both prepaid and fee-forservice insurance. Health plan enrollees decide whetherto use network or non-network providers at the time

care is needed and usually are charged sizable copay-ments for selecting non-network providers.

IPA (Independent Practice Association): An HMO

(Health Maintenance Organization) that contracts withindividual physicians to provide services to HMOmembers at a negotiated per capita or fee-for-servicerate. Physicians maintain their own offices and can

contract with other HMO’s and see other fee-for-servicepatients.

HMO (Health Maintenance Organization): A mana-

ged care plan that integrates financing and delivery of acomprehensive set of health care services to an enrolledpopulation. HMO’s may own and operate their own

clinic facilities or contract with independent practices inthe community. HMO’s establish provider staffs eitherthrough direct employment or contract.

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