HEALTH CARE ECONOMICS: STEPCHILD OF POLITICS
All of us in the United States recognize that the health care industry is economically very sick. Those of us who spent our productive adult lives in that industry realize more fully than anyone else just how sick the situation is. This isn’t just my opinion: “American consumers have steadily rated hospitals, doctors, and insurance as the lowest values for the money among the many goods and services they commonly purchase….The abundant information that is available for other sectors---data about prices, cost, quality, availability---is stunningly absent in health care too….The cost of a single episode of care remains unknown.” (Market Driven Health Care, R. Herzlinger, 1997) My wife and I have just experienced this mess, trying to find out what her surgery and post-op rehabilitation would cost. There are a number of subjects that must be covered to understand how we got where we are and what might be done about it.
First is the ethical issue of whether access to excellent medical care is an entitlement, a right of every citizen, which must be guaranteed by the Federal government, or the responsibility of the individual to arrange for his own care. Secondly, a study of the history of the incremental fiddling within and without the health care industry must be reviewed to point out the many mistakes and open up discussion as to possible remedies. A third approach must be to look at other countries’ systems of providing medical care, and how successful they have been. This implies a fourth area of consideration, the responsibility of the government to protect individuals by providing medical care and whether that should reach to the concept of protecting individuals from themselves, versus demanding that individuals be as responsible as possible for their own good health. And finally, a possible solution: a construct that involves the patient becoming an actual consumer of health care with responsibility to the payments for care, rather than the pawn of third party payers, and a change in medical institutions to allow them to offer care and insurance for medical care in one package.
Since I grew up as an adult in the medical care industry, I have my own internal biases about all of this, and therefore, a brief autobiography is in order, to allow the reader a chance to evaluate the validity of my reasoning. I wanted to be a doctor at the age of three, influenced by a courtly general practitioner from Virginia, who delivered me and cared for me until my parents moved me to another neighborhood. I was goal- oriented all the way, taking the appropriate science courses in high school, striving for the highest marks, registering as pre-med in college and taking advanced pre-med courses. I was lucky to be accepted to medical school in 1950, at a time when returning war veterans under the G.I. Bill could afford advanced educations, resulting in 30,000 applications for the 5,000 places then available in medical schools. I had five years of specialized training after graduation, becoming an internist/cardiologist. My postgraduate years were broken up by two years in the Army Medical Corps, an eye-opening experience in socialized medicine, although I also experienced socialized medicine with
some training in the V.A. system as a student and later in Houston when I taught at the V.A. here.
My experience in the Army was with a group of about 25 doctors, who volunteered for two years of service to avoid being drafted. They were all headed for private practice afterward, with or without more training. In private practice they would have to ‘sell’ themselves, but in the medical corps working from 7 AM to 4 PM, most of them were poor examples of eager physicians, perfunctorily putting in the required time in a very uninspired way. There were three of us who put on seminars and even wrote articles for medical journals, practicing medicine for the joy of practicing medicine. The few ‘regular’ army doctors who supervised us were pitiful examples of medical knowledge. They were primarily administrators who had forgotten most of what they had been taught years before. Once, as acting chief of the medical department, I had to draw up the following year’s budget request for that department. I added a few needed items and replacements, and was promptly chewed out for not automatically adding ten percent to the previous budget. Why worry about cost controls if it is not your money? The V.A. system was just as bad. Patients were treated very slowly to make sure the beds stayed filled. Empty beds might cause a reduction in budget and too many empty beds might cause a hospital to be closed. That is like trying to close an army base. I estimated that treatment for equivalent illness took about twice as long in the V.A. when compared to care in private hospitals.
As I looked for a place to practice I considered academic medicine, and in that regard have over thirty entries in the medical literature. I opted, however, for private practice, turned off by the politics I saw within medical faculties, but did accept a clinical appointment at Baylor so I could continue with a little teaching assignment to show medical students how to do excellent bedside histories and physicals with logical conclusions, i.e., how to come up with diagnoses before relying upon lab work. Entering private practice I chose to work in small medical groups, not as a solo practitioner. I preferred the backup of the knowledge of the other physicians and the support we offered each other. This decision also forced me to “sell” myself to new patients. A very large group would have fed me new patients, and I might not have learned the techniques of a good bedside manner and of convincing patients that I was acutely interested in them. Patients have an excellent antenna for picking up physicians’ attitudes, and good physicians have to present a winning manner to find and keep patients in their practice. Unfortunately a winning manner sometimes covers over the inadequacies of some physicians. This is also why working in a group helps: the group will spot a weak doctor and either demand improvement or will get rid of him. It is now clear that I prefer group practice. I chose to not join any group form of socialized medicine. Group medicine can control itself; socialized medicine applies controls from a central source.
With this understanding of my mindset we must next consider the ethics of medical entitlement. The oaths I have taken, by Hippocrates and Maimonides, insist that I must be prepared to help anyone with ill health. I absolutely agree: I am willing to do charitable work, like the pro bono approach of lawyers, but I also insist that I have the right to an income I consider adequate and commensurate to my years of training (for me, 13 years after high school). The medical profession must provide care for everyone, whether they can pay or not, whether they are insured or not. Everyone should have access to the best care as represented by the medical experience and knowledge of the treating physicians.
On the other hand, the circumstances of that care can be very variable. On one extreme the wealthy can afford fancy suites on Fondren 12 of Methodist Hospital with an attentive concierge, while the poor are treated in charity clinics and wards. However, the medical care can be equal. If the poor person is at a medical school clinic or on a teaching hospital ward, his care is at the highest level. In an outlying hospital that cannot be claimed. Texas has the ideal solution, although inconvenient for the patient: transfer to John Sealy Hospital, the teaching hospital for the medical school in Galveston. Large communities also provide what amounts to charitable care: Houston has Ben Taub Hospital, New Orleans offers Charity Hospital, Chicago with Cook County (the real name for the hospital in “ER”), to mention a few of the famous ones. Even if health care can be equal, it is well “known that the more affluent and better-educated members of a society tend to live longer and healthier lives.” There are “societal mechanisms—for example, income inequality leading to health inequality---tightly linked to political processes that influence government policy. Income inequality [leads to] higher levels of social mistrust…,lower participation in political activity (such as voting, volunteering for political campaigns).” (“Is Inequality Bad For Our Health,” Daniels, Kennedy and Kawachi, 2000)
As the quote indicates the truly indigent and the poor are relatively disconnected from mainstream society, and have unequal medical outcomes in terms of general health and length of life, in large part due to their lack of education. But of the 84.4 percent of the population insured in a survey in 1997, 23.2 percent are the poor covered by public programs. (“Health Care Policy and Politics in America”, Patel and Rushefsky, 1999) As an aside, note that about 15 percent of the population are uninsured and this has been a relatively constant figure over the past decade, accounting for the 40 million uninsured people, the number always quoted. But about “half are uninsured for four months or less, and only 15 percent are uninsured for more than two years,” and this relates directly to being employed or unemployed, or being between jobs. (“Patient Power”, Goodman and Musgrave, 1994) Therefore, as these statistics show, our country is trying to live up to the ethical standard I have declared, trying to provide care for everyone, but it is a jerrybuilt system which grew by incremental accretion, not as a well-organized structure. As we all know, medical insurance is primarily available through employment. No other country is like this. Should our government, like most other Western countries, provide total medical care as an entitlement, the late lamented Hillary plan, or is there a better way? As this paper will demonstrate, I think there is a better way. But first, let us look at a brief history of how we got the structure we have.
Although the concept of insurance goes back to the time of Babylon, Greece and Rome, home-grown insurance in the American colonies got its start in 1751 when Ben Franklin started the Philadelphia Contributorship for the Insurance of Houses From Loss by Fire. He also suggested starting organizations for life insurance and in 1759 the Presbyterian Synod of Philadelphia started a life insurance company to protect its ministers and their dependents. Although there developed some fraternal and beneficial organizations to protect payment for members’ health, surprisingly, it took until 1929 for the first health insurance to appear, Blue Cross, covering hospitalization, soon to be followed by Blue Shield to cover the doctor bills. Blue Cross was sponsored by the hospitals and Blue Shield by state medical societies. Other private health insurance appeared in the 1930’s. With the advent World War II and a very tight labor market, employers competed for employees by offering health-coverage plans, and Congress obliged by exempting these benefits from the wartime freeze on wages. Later in 1951 the I.R.S. ruled that these benefits were a tax-deductible business expense, which ruling solidified the current arrangement that health insurance comes though employment. (“Health Care Politics and Policy in America”)
The original policies had been offered to individuals, but recruiting larger groups of workers allowed policies to be issued to the employer that even covered employees with pre-existing conditions. The insurance company could actuarially justify this approach since so many healthy younger workers were in the employee group, preserving enough profit to allow the acceptance of workers with ‘conditions’. In 1940 only 12 million people had private health insurance. As a result of the changes initiated by the employers and Congress, by 1950, 77 million were insured and this swelled to 123 million in 1960. (“Health against Wealth,” George Anders, 1996)
When I was in residency training in Cleveland, Ohio in the later 1950’s all the hospitals of that city, private and public, added to the insurance aspects by agreeing to a blanket fee for each patient. Each institution studied its budget and determined the cost-per-day for average patient care in the hospital, and that is what Blue Cross was charged. Thus the bill of the very ill patient, whose cost of care was very high, was mitigated by sharing the costs with everyone else.
This system was a variation of the ‘cost-plus’ system of reimbursement used throughout the country from the 1940’s thru the 1980’s. It “worked like this: If Blue Cross patients accounted for 25 percent of a hospital’s patient-days, Blue Cross reimbursed the hospital for 25 percent of its total costs. If Medicare patients accounted for 30 percent of the hospital’s patient-days, Medicare paid the hospital 30 percent. Other insurers reimbursed in much the same way. Health insurance literally ensured that hospitals had enough income to cover their costs, and [in fact] the health insurers acted as agents not for their policyholders but for the suppliers of medical services.” There are three economic results if one uses dynamic scoring to evaluate this method of reimbursement. 1) “The only way the suppliers could increase their incomes was to increase costs, [thus] the cost-plus system invariably led to rising health care costs.” 2) “Patients had no reason to show restraint, since the funds they spent belonged not to them but to third-party institutions. When they entered the medical marketplace, they were spending someone else’s money, not their own.” 3) Physicians prefer to practice medicine “free from the constraints of money. [Under this system] physicians had no idea of what [the] costs were. [They] were inclined to do anything and everything that might help the patient.” (“Patient Power”, Goodman and Musgrave, 1994)
Dynamic scoring is the concept of using knowledge of human behavior as part of an economic analysis. Point 3 is right on. As a young physician, trained in a non-profit teaching hospital, I treated the patient to the best of my ability, which implied using every weapon at my command, damn the cost. When I first started working in a private clinic I followed the same mode of treatment. Then after a few months I made the mistake of looking at the bills I ran up. I was aghast and decided never to look at a bill again, so as not to interfere with my best judgment in handling the patient.
We’ll get back to cost-plus which changed over the years, but to keep chronology in order the Hill-Burton Act must be added to the mess that was being created. That was in 1946. Officially it was the National Hospital Survey and Construction Act, but always was referred to by the names of the Congressmen who were the authors. It was the only portion passed of an attempt by President Truman “to enact government-run health insurance for all. ‘We can afford to spend more on health,’ he [had] told the country in 1945.” (“Health Against Wealth”) The program provided federal funds to subsidize construction of hospitals in areas of bed shortages, mainly in rural counties. “State public health agencies were made responsible for surveying the hospital bed supply in each state, and for developing a master plan for the construction of new hospitals.” The agencies also inspected and licensed all hospitals and related facilities. It is not hard to imagine the feeding frenzy in the medical community. Pushed by needy doctors who had to refer their patients to distant hospitals, and pressured by a local population, what politician or bureaucrat could refuse a hospital in an outlying area? Between 1946 and 1966 the total number of hospitals jumped from 4,445 to 5,736. “The rate of hospital admission per 1,000 population increased from 54 to 129 by 1960.” (Health Care Politics and Policy in America”) And keep in mind that the cost-plus system of reimbursement guaranteed a steady income for all these new hospitals. In 1946 one day in the hospital cost $9.39. By 1966 that amount was $45. And “by 1985 many community hospitals had turned into ‘medical centers’ packed with expensive diagnostic equipment that could generate $2,000 a day or more in bills for patient testing.” (“Health Against Wealth”)
One would think that a plethora of hospitals would reduce medical costs through competition. Not so. The medical community tends to raise charges to keep income the same when competition reduces the available number of patients. (“Government by Political Spin”, pg. 66) The health insurance companies added to the mess. They insisted that a patient had to require hospitalization to be worked up for a problem in order to justify them paying for it. “Conditions” had to be described as sicknesses. A hospital is a very tremendously expensive hotel. Medical clinics could do the workups at a fraction of the cost, but the insurance companies would disallow the charges, if the patient accomplished this as an outpatient. The insurance companies were under the misguided idea that they insured illnesses only. They did not seem to understand that ‘conditions’ led to ‘illnesses’. Perhaps the insurance companies thought they were saving money by insisting that the patient had to be sick to warrant insurance reimbursement; actually many of these investigations were a form of preventive medicine which in the long run saved the insurance company much more money than they were trying to save by insisting upon current ‘sickness’.
Medical services were just four percent of the gross national product in the 1940’s and now are 14 percent (“Health Against Wealth”), only partially as a result of these economic derangements. During these years medical research was on a rampage, aided by huge government grants most often obtained through the National Institutes of Health (1930) and later the National Science Foundation. A negative side effect of these grants is that politics could influence the thrust of research, as occurred in AIDS research in the 1980’s and 1990’s being so emphasized at the expense of other diseases which affect much larger populations of patients. Aside from this negative effect from politics, this research opened a floodgate of advances. Before 1930 there were only six, yes six, pharmacologically useful drugs: Digitalis for the heart, Quinine for malaria and certain heart rhythms, Heroin or its derivative Morphine, Belladonna, 606 or Salvarsan for syphilis, Novocain (a derivative of cocaine) for local anesthesia, and one might add ether for its usefulness in surgery. The first sulfa drugs appeared roughly at this time, were poorly understood and very dangerous to the kidney, but helpful in some infectious illnesses.
With the serendipitous discovery by Dr. Arthur Fleming of penicillin in the 1930’s and the rapid advance of biochemistry, in the 1940’s and thereafter there was a literal tidal wave of pharmacological products which were costly to discover and test but extremely beneficial to the patient. A mixed blessing: high costs driving up medical spending, but a great help to the sick patient. Using lobar pneumonia as an example, a disease now never seen, except perhaps in third world countries, the benefit is enormous. Untreated lobar pneumonia resulted in the patient becoming sicker and sicker, bedridden at home with high fever, until about 14 days had passed. Then the “crisis” occurred, with even higher fevers, suddenly followed by a drop to a normal temperature, if the patient survived. There followed about four weeks of slow recovery until the patient regained enough strength to resume normal activity. Penicillin stops this entire process, if caught early enough, in five days. Six weeks against five days! The drug research and the high cost of antibiotic medications is worth it when viewed this way.
As an example of many medical advances, another cause of rapidly rising medical costs was the development of diagnostic equipment in the x-ray department. Again a mixed blessing in that much more could be speedily learned about the patient with less and less discomfort but the cost of some of the equipment was in the millions of dollars. First came the image intensifier which used TV engineering to so improve the images in fluoroscopy, that only a tiny fraction of x-ray power was necessary. Then the tomogram, rotating the x-ray tube in an arc, pinpointing a lesion within the patient to show it very clearly. This was followed by the computerize axial tomography (CAT) scan, using the tomogram combined with a powerful computer. An ordinary x-ray is a two-dimensional representation on film of a three-dimensional part of a patient. The CAT scan changed everything to one centimeter slices of cross-sectional anatomy, allowing the ability to survey almost in three dimensions. The CAT scan can spot lesions down to one centimeter in size. And finally the advance to magnetic resonance imaging (MRI) scans, using magnetism of the water in the body. When the magnet was turned on the water molecules lined up in one direction. When it turned off those molecules spun back to their original alignments. Radio waves are bounced off the spinning molecules, changing the resonance (wave length) of the waves. Analysis by a massive computer of these radio wave changes again produces pictures of cross sectional slices of the body, seeing lesions down to ½ centimeter. Both the CAT scan and the MRI have separate areas of the body where they each gave better results, but at times physicians will order both. With the number of hospital beds growing rapidly, every hospital of any size wanted to offer these gadgets to stay in competition for patients, driving up overall medical spending.
And drive up medical spending they did. Total national health care expenditures were $26.9 billion in 1960. By 1996 those total expenditures were $1.035 trillion!! Looking at selected segments of this spending, hospital care rose from $9.3 billion to $358.5 billion in the same period. Physician services went from $5.3 billion to $202.1 billion. Medicare was no different, climbing from $7.3 billion to $197.8 by 1995, and Medicaid jumped from $5.3 billion to $139.7 billion in 1995. (“Health Care Politics and Policy in America”) To be fair in analyzing this huge jump in costs several factors must also be mentioned: inflation plays a role; population growth plays a role; the research that produced all the medical advances each contributed to this enormous increase in expenditures; and tort liability (also known as medical malpractice cases and class-action law suits against drug manufacturers), which was estimated by Peter Huber in 1997 to account for $50 billion a year of those costs. (Forbes Magazine, 1/27/97) For example, in Texas there are 50 medical malpractice claims for every 100 doctors. (Houston Chronicle, 8/31/02)
Another event which tremendously increased health costs was the invention of the 911 system. In 1973 Congress passed the Emergency Medical Services Systems Act, which set up 300 EMS systems around the country, with local phone companies creating the ‘911’ emergency phone network. Actually a marvelous advance. I can remember making house calls on critically ill patients, calling the ambulance myself, and hoping it would arrive in time. But there is always the Law of Unintended Consequences. “Governing this massive buildup was a belief that every distress call should be treated as a potential medical disaster until proven otherwise. The emergency room became a medical testing center.” Patients were quickly trained to realize that the ER’s were always available for care, any care. They were there if you didn’t have a doctor, or if you didn’t have money. When hospitals, inundated with nonpaying indigents, tried to refuse care, the Congress in 1986 “required the hospital ER’s to do medical assessments of all ER visitors and to stabilize the sickest ones, without regard to their financial status.” ER prices had to rise to cover this charity care. (Health Against Wealth)
But the lack of a true market system made the greatest contribution to what looks like a runaway train. (“Health Care Politics and Policy in America”) Patients are spending someone else’s money, hardly any of their own. The patients may have illnesses or conditions that make them hurt, but they are not having any monetary pain. In 1990, 95 percent of all hospital costs were paid by third parties. Those same third parties paid 81.3 percent of doctor bills, 55.2 percent of nursing home care, and 26.4 percent of drugs, for an overall average of 76.7 percent third party payment for all medical care in 1990. (“Patient Power”) And as mentioned before, the hospitals, under the cost-plus system, had no reason to hold back purchasing every new gadget to compete by offering more and more services. Medical costs could spiral just so far before becoming very painful.
Starting in the 1970’s and into the ‘80’s the politicians had to act by allowing the imposition of cost-control on the cost-plus system of payment. In 1973 Congress passed an HMO Act which mandated that “companies with more than 25 employees and a conventional health insurance plan [also] to offer at least one HMO as an alternative.” The following year The Employee Retirement and Income Security Act (ERISA) had a provision that exempted corporate benefit plans from state laws. This became an unintended protection for HMO’s against being sued in state courts. And until the mid-1990’s the federal courts interpreted the Act as not allowing HMO’s to be sued for medical negligence. This acted as tremendous protection for the HMO’s to hold down costs without fear, as they denied care. That is now changing as appeals courts and altered laws are beginning to permit suits to be presented. (“Health Against Wealth”) Also in 1974 Congress passed the National Health Planning and Resource Development Act, replacing the Act that developed all the Hill-Burton Hospitals. The law required all states to adopt certificate-of-need laws by 1980. Hospitals now had to justify the purchase of equipment before being allowed to do it. New free-standing institutions, new hospitals, and new dialysis units, for example, all had to pass the same muster. (“Health Care Politics and Policy in America”)
Medicare and Medicaid, started in 1965, of course, ran into the same expense troubles. At first they also employed the cost-plus system, with Medicare willing to pay 80 percent of ‘reasonable’ charges. This generous approach by the federal government was purposeful, to win over the political support of private physicians. Medicaid was paid for by the states under federal mandates and helped by grants of federal money. Total Federal health care expenditures jumped from $2.9 billion to $17.8 billion in the period of 1960-70. Medicare increased expenses from an initial $1.6 billion in 1966 to $7.1 billion in 1970, while Medicaid went from $1.3 billion to $5.3 billion. By 1980 Medicare was spending $109.3 a year and Medicaid $71.4 billion. These numbers obviously exceeded many fold the original 1965 estimates of cost. . (“Health Care Politics and Policy in America”) Cost-containment was mandatory. Medicare set up huge registries of codes for illnesses with ‘allowed charges’, of which they still paid 80 percent.
In 1978, New Jersey, after an appropriate period of study and in desperation, adopted a prospective reimbursement mechanism for hospital care. This was called the DRG’s (diagnosis related groups). All 467 DRG’s covered every conceivable illness or problem handled in a hospital and prescribed the number of days of hospitalization and the proper charges. There were coding numbers for severity to allow some variation. This was adopted by Medicare and Medicaid in 1983. Immediately a whole industry appeared teaching doctors and hospitals how to code for the most reimbursement. Those courses are still advertised and utilized by practicing physicians and hospitals, as the battle for money goes forward. The DRG’s were a disaster for the VA policy of ‘keep the beds full.’ It took several years of complaining to get that bureaucracy to comply.
The original HMO’s (Health Maintenance Organizations)were not called that. Blue Cross was started by hospitals to make sure they got paid. It was non-profit, as was Blue Shield set up by physicians with the same motive. Henry Kaiser set up Kaiser Permanente in the 1940’s to protect the workers in his shipyards, steel mills, aluminum plants, etc. It was cheap, reliable care with vertical integration, offering clinics, and hospitals which were manned by hundreds of doctors as employees. This was on the West Coast and still is very successful in that region with about 9 million customers. Another well-known effort was the Health Insurance Plan (HIP) of New York. It evolved from a large group practice, and like Kaiser Permanente was non-profit. “In the late 1970’s leading non-profit HMO’s spent about 94 percent of premiums on members’ medical treatment.” (“Health Against Wealth”)
With the passage of HMO laws by Congress for-profit HMO’s entered the picture. “The financial world’s values started seeping in. Quarterly earnings mattered much more than before. Top managers hovered over computer printouts showing membership growth rates, hospital days per thousand members, and other statistical benchmarks.” The corporate mission of these HMO’s was to control medical costs. But cost control now became crucial for other reasons. “Securities analysts and big investors refused to support a health plan that spent ‘too much’ on member and left too little for shareholders. Thanks to increasingly generous stock-option packages, executives’ own fortunes became closely tied to the wiggles of their company’s share price.” (“Health Against Wealth”) As mentioned, in the 1970’s leading non-profit HMO’s spent about 94 percent of premiums on medical care. Kaiser Permanente and other non-profits still are spending over 90 percent. The for-profit publicly traded HMO’s are a different story. As must be expected cost controls are crucial to these companies: In 1993 their medical-loss ratio dropped to 78 percent of premiums, and in 1994 the average was 76.6 percent. Some companies have done even ‘better’: U.S. Health care got its ratio as low as 68 percent in the fourth quarter of 1994. (“Health Against Wealth”) ‘Better’ is not the way to view this. HMO’s were brought into the battle to reduce costs, not to suck off 30 percent of the premium cash flow. Cost control by HMO’s was anticipated in the 1970’s from the records of the non-profits. But the for-profits achieve control by devising rules and rationing of care. Imagine driving a very critically ill baby 25 miles to a designated ER, passing several ER’s on the way. The HMO saves money because its contracted rates with the distant ER are lower, and the care is OK, if the baby lives to get there, just one of the horror stories in the books I have reviewed.
What this brief history shows is at first a massive pouring of money into the medical industry. Not surprisingly this led to a massive over utilization of somewhat limited medical services with enormous increases in medical prices, and primarily because the customers of that service were using other peoples’ money. Studies have shown “that people who [have] access to free care spend about 50 per cent more than those who had to pay 95 per cent of their bills out of pocket. Also, 25 per cent [are] more likely to see a physician and 33 per cent [are] more likely to enter a hospital.” (Patient Power) The government and insurance companies, rather than stepping back and totally redoing the system of payment, in desperation have added a system of price controls. When this happens “the central focus of third party paying institutions is on eliminating ‘waste’. Yet bureaucratic institutions (operating principally through reimbursement strategies chosen by people remote from actual patients and doctors) usually cannot eliminate waste without harming patients. By the very act of trying to control prices, they invariably focus on a normal price for a normal service, ignoring patients and institutional settings that are not normal. In the act of trying to control quality (for example, by eliminating ‘unnecessary’ surgery or ‘unnecessary’ hospital admissions) they again invariably set standards for what is normal---ignoring the unanticipated, abnormal circumstances in which medical care is often delivered.” (Patient Power)
The other countries with national health services, totally paid for from government coffers, solve the runaway costs in a different manner. They simply limit the funds available and even the institutions available, i.e., not rebuilding old hospitals or adding new ones when the demand for beds increases. This forces the medical professional to ration health care, for example, actually refusing to offer kidney dialysis to the elderly (England) or to line patients up to wait with appointments into the future to receive care. In Britain there is a safety valve in that a private service is allowed, and if the patient has the money, he can jump to the head of the line and see a private physician. In Canada the safety valve is this country, and insurance companies there will pay for care in the U.S.
When viewing national economy as a whole, the act of rationing health care is a losing matter. “Delay in access to care, denial of high-technology specialist care, and lack of preventive care permit governments and managed care to reduce their health care costs. But the ‘savings’ are illusory---people pay for these savings by spending their ‘free’ time in waiting for health care and we ultimately pay for them with greater number of sick days and lower work productivity. The so-called savings in health care budgets pop up as increases elsewhere in the economy. (“Market Driven Health Care”)
Before discussing possible solutions, another aspect of the problem is the way that our government relates to it citizens through the Public Health Service (PHS). “The public health bureaucracy, like all bureaucracies, is concerned with expanding its own size, scope and budgets, even when such an expansion provides nebulous benefits to the public. The public health movement [has become enormously politicized. It] is no longer interested primarily in the eradication of disease; it claims to offer expertise on virtually every social issue, from poverty to human right.” (“From Pathology to Politics: Public Health in America,” Bennett & DiLorenzo, 2000) “Its stated objectives are: preventing and controlling disease, identifying health hazards, promoting healthy lifestyles, assisting in the delivery of health care services, administering block grants to the states for health services, ‘ensuring’ that drugs medical devises are safe and effective, protecting the public from unsafe foods and ‘unnecessary exposure’ to ‘man-made radiation,’ conducting and supporting biomedical research, and working with other nations on ‘global health problems.’” (“From Pathology to Politics”) Not only does this mean that the PHS can try to enter almost all aspects of our daily lives, it will have a loud voice in advising Congress on solutions to the monetary crisis in health care.
Public health matters really matter to the Congress. In the House of Representatives there are 20 committees and 33 subcommittees that play a role in health affairs. The Senate is no different. There are 17 committees and 23 subcommittees. This plethora of committees allows most congressmen to have a say in public health issues, and boast of it to their constituents. With this intimate relationship between the Public Health Service and most congressmen, it is important to understand what the PHS has become. Part and parcel of the PHA is the American Public Health Association (APHA). Both bureaucrats from the PHS and ‘experts’ from the APHA will be testifying before those multitudinous congressional committees. As a hint note that the APHA strongly supported the failed Hillary health plan. The public health profession has had a progressive history of adopting an increasingly socialist position. “In less than a century [they] have evolved [as a profession] from one concerned primarily with sanitation, disease, hygiene, clean air and water, and other matters directly related to improving the healthiness of everyday living, to lobbyists and advocates for an enlarged welfare state. The route to ‘public health’ was transformed from efforts to control disease to efforts to affect living standards by controlling behavior and income…Since 1968 a top priority---if not the top priority---of the public health establishment has been to promote the idea that more government control and intervention is the surest route to sounder health.” (“From Pathology to Politics”)
“From Pathology to Politics”, in a careful review of policies espoused in The Nation’s Health, the mouthpiece of the APHA, lists the following political positions: cessation of nuclear testing, the creation of a 1930’s-era government-financed ‘jobs’ programs, regulation of guns as a consumer product, promoting unionism, forbidding advertising that moderate wine drinking has heart health benefits, publicly condemning the Republican Party’s “Contract with America,” raising the minimum wage, and lobbying constantly for onerous taxes and regulations on private health care providers in a campaign to hamper their role in the market. It is hard to see how many of these policies relate in any direct way to “health” in the customary way of defining health. But this next policy quote does relate! “A national program for universal, comprehensive, personal health services is required as a basic guarantee of equal opportunity for good health.” (Quoted from APHA, Public Policy Statements, pg. 97) Obviously, their key objective is nationalized health care, a la, Great Britain. When their members testify before government committees, they are advised to ask the politicians to “prohibit requirements that regulation must always demonstrate a positive cost-benefit ratio,” especially when related to decisions about health-related laws and regulations.
The Centers for Disease Control (CDC) are part of the PHS. “The agency now spends tens of millions of taxpayers’ dollars annually to train lobbyists on how to get gun control laws enacted, how to ban smoking or tobacco advertising and on other politically correct causes.” In 1996 Congress recognized that the CDC was illegally using public funds to lobby for gun control. A specific provision to stop the practice was put into the CDC appropriation bill. It was ignored. It is illegal for any government bureau to lobby: “it is illegal to spend any tax funds on partisan political activity.” (“From Pathology to Politics”)
The authors of From Pathology to Politics are not the only raised voices against the health bureaucracy. Dr. Thomas Szasz, a professor-emeritus, in his book Pharmacracy makes the same points. “In the words of former Surgeon General C. Everett Koop: ‘The government has a perfect right to influence behavior to the best of its ability if it for the welfare of the individual and the community as a whole.’ That is a dangerous opinion, the more so because ever so fewer people realize that it is dangerous…Just as the metabolism of the body anatomic requires nutrients, so the metabolism of the body politic requires enemies or, at least, scapegoats…The [medical governmental] experts tell us that we eat too much, drink too much, smoke too much, gamble too much, take too many drugs; that we behave irresponsibly with respect to sex, marriage, procreation, exercise, and health care; that we commit too many murders and suicides, too many assaults, thefts, and rapes; and that all these things are not really our own doings but the manifestations of maladies. In the past, politicians seized power by declaring national emergencies. Now they do so by declaring public health emergencies. Alcoholism, obesity, suicide, violence, they say, are killing Americans. Individuals are not responsible for eating or drinking too much, for killing themselves or others. The rejection of personal responsibility for one behavior after another---each deliberate act transformed into a ‘no-fault disease’---drives the politics of therapy.” The implication is that we must “enlarge the scope and coercive powers of the medical bureaucracy as an arm of the state.” Szasz concludes; “No person can be free without shouldering his responsibilities, and no society can endure without penalizing irresponsible behavior. Liberty is undermined by the irresponsible and is destroyed by tyrannical government.” Sounds just like Hayek: “Liberty not only means that the individual has both the opportunity and the burden of choice; it also means that he must bear the consequences of his actions. Liberty and responsibility are inseparable.” (“The Constitution of Liberty”, Friedrich A. Hayek, 1960)
Most of us do not realize how this approach has insidiously crept up on us so that we do not notice the implications. The comments quoted above predict the following: Perhaps you spotted this headline in the Houston Chronicle on 11/4/02? “Violence must be treated as public-health issue”, an op-ed piece by Deborah Prothrow-Stith, a professor at the Harvard School of Public Health. The author quoted from a World Health Organization (WHO) report on increasing violence in the world. “The report raises awareness of the huge impact of violence worldwide…The report fails to place enough emphasis on the impact of culture on violence. As we see more and more girls and women participating in violent behavior in the United States, we are forced to acknowledge the role of cultural influences among the risk factors for violence. (My comment: What a non sequitur!) The world can learn from the mistakes made in America and not repeat them. (My comment: the far-left always blames this country.) Now is the time for the world’s public-health practitioners to join with law enforcement and respond.” These are the people who will be testifying to Congress in any hearings considering changing the health care system.
At this point the reader is aware that individual responsibility must become a major aspect of changing our health care system. Our government, through its Public Health Services, should offer information and education in truly medical fields to help individuals make reasonable decisions. Let us not diffuse our resources by having the PHS attempt to alter our cultural deficiencies, if in fact the suggested deficiencies are really deficiencies. The key to the solution of the economic mess in private medical care is in utilizing individual responsibility. Public care for the indigent is a different matter.
In economic terms the medical market is in disequilibrium. Supply and demand are not matched and they cannot control each other as they should in a free market system. The reason is obvious. The medical consumers are playing with Monopoly money. They are personally responsible for only 5 percent of all payments for services. The remaining 95 percent is hidden in transfers of funds through massive paper work at extra cost to the system. Medical consumers are encouraged to overspend because so much is hidden. If they had to make choices in using their own money, for example, take a vacation or have plastic surgery, the vacation might be more important and the surgery would have to be put off. The over-consumption is called “deadweight loss” and amounts to 28 percent of total health care expenditure (“Six Questions Everyone Should Ask About Health Care System Reform: An Application of Basic Economics,” Jesse S. Hixson, Ph. D., Principal Economist American Medical Association, March 2002) To reduce the expenditures, the HMO’s, PPO’s, IPA’s, other alphabet-soup groups and the insurance companies have added price controls to this process, another layer to the mess which requires even more paperwork for control (paperwork that substantially increases costs), and adds to the disequilibrium by making the pricing artificial. For a free market system to work properly, supply and demand, costs and pricing, shortages and surpluses all must be able to move and influence decisions in a completely free manner. This freedom produces a market that is in equilibrium. (Hixson)
Although most other countries in the world have chosen medical care by government service or socialized medicine, Americans have rejected this approach. First by ignoring the wildly conceived Clinton plan in 1993, and more recently by turning down the Oregon State universal care plan in the November 5, 2002 vote by 79 percent against. The state was to become the sole payer. It is estimated that the proposed plan would have created an Oregon payroll tax of 3-11.5 percent on employers and raised the state income tax by as much as 8 percent. (Wall Street Journal, 10/29/02) (Who would have paid for the fence around the state to keep out indigents from other states?)
Currently most of the funds to cover medical care comes from employment, and the tax code allows that as a deductible expense for employers. As suggested in Government by Political Spin that money is already built into the economic system in this country. It is covered in the pricing by each company. Remove the employers’ responsibility for picking the group plan and let the employees organize and choose their own plans, in open competition among those available. Give the medical care money directly to each employee. The employee is then free to join the industry group plan or pick a plan of his own choosing. The employee must use some fraction of this money to purchase a plan and prove this to the Internal Revenue Service for the money to remain tax free. The remaining money is saved tax-free to cover other health care expenses. Any unspent money may be accumulated from year to year and build up to protect against a catastrophic illness not entirely covered by insurance.
This is the widely-discussed Medical Savings Account (MSA) proposal that makes a great deal of sense to me. (“Market Driven Health Care”) This should get rid of the ‘deadweight loss’ from over-insurance of 28 percent, brought about by the employers doing all the insuring. Individual employees will find that catastrophic insurance is the best way to be covered, rather than comprehensive insurance that provides co-payments for every unimportant little office visit to the doctor. Catastrophic plans are much cheaper than comprehensive plans. Comprehensive coverage is mandated for employer plans in most states as part of the laws regulating health care. These requirements will have to be removed. The MSA should allow a person who becomes unemployed to have the funds to cover himself until the next job is obtained. Further, if it is found necessary, Congress could mandate a ‘safety period’ of several months, during which time the unemployed person remains in his old group, again, until he is re-employed.
The Federal Employees Health Benefits Program (FEHBP) already uses a part of this system. The employees choose their own group plans competitively. The program covers 2.7 million federal employees and dependents for a total of almost ten million people. “The results? The FEHBP’s premiums have risen at rates 40 percent lower than those of medium and large employers. In 1995 its premiums actually declined by 4 percent.” (“Market Driven Health Care”) Much information is available now for employees to make informed decisions. This should work in the private sector also.
The MSA proposal offers a series of advantages. There is individual responsibility; the insurance they choose will most likely be less costly; there will be much less paperwork because there is no third party between doctor and patient (in 1994, this cost was an estimated extra 33 billion dollars); the doctor and the patient will much more directly relate to each other again, without a third party deciding what care and payments are allowed; and finally, enhancing a more competitive medical market place. (“Patient Power”)
There will need to be changes in tax laws to cover the individual who purchases health insurance on his own. He should have the same privilege as the business owner. His costs should be tax deductible also, as long as he can prove to the IRS that he has purchased a catastrophic plan. Another tax law change must cover the problem of the very small business that is too small to be required to offer health insurance as a benefit. Small business regulations are now so onerous and costly, that it is difficult to fund the start of a business. The solution in this circumstance is, as above, giving the individual employee a tax deductible advantage while mandating that a percentage of his salary is placed in a medical savings account, just as a portion is mandated to fund his social security account. This may hamper the start-up company by forcing it to have higher salaries, but this country, historically, has inadvertently arrived at paying for medical costs through employment. It is built into the pricing system. I see no way to leave small business out of the system we have.
There are also necessary changes in insurance company regulations that are needed to make small company and individual health policies receive the same premium rates as large companies and large group policies. “Health insurers must be required to charge everybody who lives in a certain area the same rate, regardless of their health status. This pricing mechanism is called community rating.” And concurrently, “health insurers are permitted to charge rates that reflect the health status of the [individual] insured. This pricing mechanism is called experience rating.” (“Market Driven Health Care”) These requirements will cause small company and individual premium rates to more closely reflect the rates in large plans in that community, while giving the insurance companies no reason to ‘cherry-pick’ only the healthy to insure.
As an aside, Singapore, remember this is a dictatorship, has mandated compulsory savings, including a medical savings account. Hospitals are being privatized, costs are reduced, government health care is minimal and 90 percent of Singaporeans own their own homes, paid for in part from excess funds in these savings accounts. Although these funds went into a central government account at first, now the citizens can self-direct up to 40 percent of their individual accounts. This example shows what an increased savings rate can accomplish for a country. It is too bad that Americans have such a poor rate of savings, but this country is not encouraged to save by the laws in place (“Patient Power”), and our American culture is conditioned to instant gratification and buying on the installment plan.
Another way to increase competition and thereby reduce pricing is to encourage, or perhaps mandate, the development of larger doctor groups, which would then offer their services in competition with other medical groups to the employee insurance associations that are now managing their own affairs. Doctors in large groups can monitor quality of care by individual physicians in the groups. Paperwork is reduced to simple bills to the employee’s insurance association, just as it was in the early days of medical insurance. (Herzlinger covers this in Market Driven Health Care)
Medicaid is a different matter. State funds will have to be expended as before. But one large saving would be not to send money to Washington, only to have a portion of it sent back as Medicaid grants. The round trip costs up to 70 percent in some other programs. (“Burning Money,” J. Peter Grace, 1984) We should be able to reduce Federal taxes and increase state taxes to accomplish this, but don’t bet on Congress ever giving up any Federal tax income. In recent years the Congress has continued various Medicaid mandated activities for the states and has reduced the grants. The states need to experiment (as in welfare reform) to find ways to reduce costs while maintaining quality. For example, the Arizona Medicaid program, starting in 1982, has used managed care and competitive bidding to lower costs. In 1991 a federal governmental study showed that costs were only 81 percent of what a traditional program would cost, and in the 1994-5 period expenses per patient dropped 11 percent. Advocacy groups for the indigent found that mainstream medicine was maintained. (“Government by Political Spin”) Medicaid expense is currently in an emergency situation. At the present time 20 percent of state expenditures in this country are for Medicaid. (“Memo to Rookie Governors: Cut, Cut, Cut.”, William D. Eggers, WSJ, 11/6/02) With the current drop in tax revenues, the states are in real trouble. It will either mean cutting services, or finding more competitive bidding among groups offering medical care without losing efficiency in that care. Setting up large medical groups to bid in competition, as suggested for the solution to private care, should help, if the Arizona plan is as good as claimed.
Will all this happen? Not unless there is a profound change in Congress. Politicians love to promise something for nothing. They hate to do more than ‘feel-good’ tinkering. A change of this magnitude will require a ground swell of public opinion in favor of this approach, and careful refutation of the public health officials who will be testifying negatively. But it is a workable solution that simplifies the entire situation, returning medical economics to a free market system, one that has been proven to work to lower costs throughout the history of capitalism.
Presented by David J. Turell, M.D.