Competition may not improve health plan quality, but that doesn’t mean people don’t care about health plan quality, at least a little. The literature review in “The impact of health plan report cards on managed care enrollment,” by Dennis Scanlon, Michael Chernew, Catherine McLaughlin, and Gary Solon (JHE, 2002) makes this clear.
First, the concept of managed competition is predicated on the notion that consumers should have and will respond to quality information.
When choosing among competing plans, consumers optimally would consider both price and quality. Advocates of managed competition argue that the competitive model will promote efficient market outcomes (Enthoven, 1993).
And, indeed, people care about health plan quality.
[Spranca et al. (2000)] find that in the absence of the CAHPS ratings, the study subjects prefer plans that are more expensive and provide more coverage, while respondents with access to the CAHPS ratings are more likely to enroll in less expensive plans covering fewer services when these plans received favorable CAHPS ratings. The authors conclude that favorable CAHPS ratings can prompt consumers concerned about quality to enroll in lower priced plans when they otherwise might not. […]
[Farley et al. (2002)] find a  link between enrollment and the [CAHPS] ratings for [Medicaid managed care enrollees]. […]
[Schultz et al. (2001)] find that employees are using service quality information, particularly those employees who are new to the health care market or who change care systems. The findings from this study are important when considering the effectiveness of report cards since they suggest that consumers may find ratings more useful when they measure the quality of care provided by physicians rather than health plans. […]
[E]mployees avoid plans with many below average ratings relative to plans with many average ratings. Employees do not appear to be attracted strongly to plans with many superior ratings. This result is consistent with recent focus group, survey, and laboratory studies, which found that individuals are more likely to avoid low-rated plans than select high-rated ones (Hibbard et al., 2000).
The authors’ own work is consistent with these findings.
During the 1997 open enrollment period, GM disseminated a health plan report card for the first time. […] Results with respect to report card ratings suggest that individuals avoid health plans with many below average ratings.
So, if people are at least a little responsive to quality, why doesn’t competition affect it? I suppose one answer is that plans don’t try to affect quality. They have the quality they have and people respond as they see fit. But put plans in competition and they don’t respond in the dimension of quality. They don’t compete on it. Why? Maybe because quality is hard and people care more about price, so that’s what plans focus on. I’m speculating.
Another thing that may be going on here, is that the studies described above largely define quality in terms of consumer satisfaction. The CAHPS survey, for example, is a consumer satisfaction survey. It is completely plausible that consumers respond to notions of satisfaction but do not respond to more clinical measures of quality (whether process or outcomes). This idea is consistent with what I wrote about Schoenbaum and Coltin (1998) . Health care is a credence good but health insurance is less of one.
Also, for the benefit of my future self, I want to note that the paper discusses a chief limitation of Chernew and Scanlon (1998).
[Scanlon and Chernew (1999) shows that] unobserved plan traits (e.g. ease of specialty referrals) are probably important determinants of plan choice, and the omission of [control of] important plan traits [in Chernew and Scanlon (1998)] could bias coefficient estimates due to the correlation between the unobserved attributes and the ratings.
UPDATE: Added paragraph that begins “Another thing that may be going on here …”
Chernew, M.E., Scanlon, D.P., 1998. Health plan report cards and insurance choice. Inquiry 35, 9–22.
Enthoven, A.G., 1993. The history and principles of managed competition. Health Affairs 12, 24–48.
Farley, D.O., Short, P.F., Elliot, M.N., Kanouse, D.E., Brown, J.A., Hays, R.D., 2002. Effects of CAHPS® health plan performance information on plan choices by NewJerseyMedicaid Beneficiaries. Health Services Research.
Hibbard, J.H., Harris-Kojetin, L., Mullin, P., Lubalin, J., Garfinkel, S., 2000. Increasing the impact of health plan report cards by addressing consumers’ concerns. Health Affairs 19, 138–143.
Scanlon, D.P., Chernew, M.E., 1999. HEDIS measures and managed care enrollment. Medical Care Research and Review 56, 60–84.
Schultz, J., Call, K.T., Feldman, R., Christianson, J., 2001. Do employees use report cards to assess health care provider systems? Health Services Research 36, 509–530.
Spranca, M., Kanouse, D.E., Elliot, M., Short, P.F., Farley, D.O., Hays, R.D., 2000. Do consumer reports of health plan quality affect health plan selection? Health Services Research 35, 933–947.