U.S. health care system shows signs of terminal condition, crippled government budgets provide little aid

Some prescribe competitive markets as medicine

David Fettig | Managing Editor

Published April 1, 1991  | April 1991 issue

Earlier this year, a national health policy group surveyed state officials and asked them to list the top three health issues for 1991. One respondent said: "Budget, budget and budget."

Another replied: "The budget deficit. There is no other issue."

At a time when health care costs have been rising at twice the rate of inflation, when 37 million Americans are uninsured, when the rising price of employee health benefits is threatening the profitability of businesses, and when physicians are expected to cure the masses at minimal cost while using the world's most expensive equipment, about the only source of agreement is that there is a money problem. Beyond that, the consensus breaks down.

Consumers, businesses, insurance companies and the government all think they're paying too much for health services and those prices, they believe, are climbing out of control. U.S. companies, on average, spent an amount equal to 26 percent of their net income on health care last year, according to a recent survey by benefit consultants A. Foster Higgins & Co. Inc. Following a jump of 20.4 percent in 1989, the survey revealed that corporate medical costs climbed 21.6 percent last year, and half of the nearly 2,000 respondents believe their cost-cutting programs are ineffective.

The nation's health care system needs a fundamental overhaul, according to 52 percent of the respondents to the current fedgazette poll. Another 39 percent say the system needs at least some improvement. Also, the poll's respondents were evenly split, 50-50, on their support for national health insurance.

While government-based plans have been proposed that would attempt to contain costs and guarantee health insurance for all citizens, budget pressures and a lack of consensus within Congress and the administration will probably preclude any federal action in the near future. As illustrated above, most state governments are also strapped financially, leaving businesses, insurance companies and the medical profession to devise plans of their own.

For their part, some companies have adopted a practice known as managed care, which is a term that is generally used to describe methods of controlling costs. Some companies negotiate discounts for fees with a network of doctors and hospitals in return for the company's business. The company provides financial incentives for its employees to use the chosen hospitals and doctors, and the company—or a selected insurance carrier—monitors the quality and cost of the medical services.

Other companies use health maintenance organizations (HMOs) and preferred provider organizations (PPOs), which were founded on managed care principles, to control costs; while other businesses have health plans that require second opinions on certain surgeries or precertification for hospital admission.

To each according to his needs ... regardless of cost

The problems within the health care industry go beyond the makeup of its delivery system to the deeper levels of our cultural psyche, many analysts believe. Other countries, especially those with nationalized medicine, adhere to guidelines that prohibit some medical procedures from certain sectors of society. Would Americans, for example, agree to limit kidney dialysis or open heart surgery to only those under a certain age? In a country where the newest and most expensive life-preserving techniques are regularly employed on patients with no regard to age or other factors, the answer would seem to be a resounding "no."

Questions of ethics, sociology, politics and economics deeply complicate issues surrounding health care policy and usually serve to preclude any serious attempts at reform. At the heart of the issue is America's idea of health care, which, quite simply, allows that everyone should use all medical procedures regardless of cost, age of the patient, chance for survival or quality of life. With that unwritten policy in effect, measures that control costs are often difficult to implement. As Jane Sneddon Little, economist at the Federal Reserve Bank of Boston, wrote in the bank's recent Economic Review: "When governments lift most of the cost of ill health from individuals—either through government payment or private insurance—much unneeded medical care may result.

"If patients bear no cost, they will demand any medical service that yields even a small benefit. If providers get paid in full for any and all services rendered, they are likely to recommend every procedure that might prove helpful to the smallest degree. ... Under these circumstances, then, the social costs of medical care are likely to outstrip individual benefits by substantial amounts—especially given the technological intensity of today's medicine."

Beyond managed care and into competition

One Twin Cities health reform advocate, George Morrow, former CEO of Physicians Health Plan and consultant for a Twin Cities business health care group, suggests that America's health care system is at odds with the country's philosophical foundation.

Morrow says it is ironic that a democratic country that prides itself on the benefits of its competitive markets, has not extended those same free-market principles to one of the largest sectors of its economy—namely, the health care industry. For the most part, doctors do not question the comparative qualities of medical equipment and patients do not question the necessity of procedures recommended by their physicians, leaving insurance companies to haggle over costs and government entitlement programs to pick up the slack.

According to Morrow, that type of behavior is bred in the bone. In many cultures and over many years, when witch doctors danced and revered physicians used leeches, the ailing public acquiesced to the opinion of the medical community. "The theory was more important than the effect of the theory. Some of that still survives," he says.

Morrow is a consultant for the Business Health Care Action Group, a consortium of large Twin Cities-based corporations that, at its core, is trying to effect change within society's medical culture. Morrow says his group would like to see a shift in the medical debate from concerns about cost to those about value. Cost-containment measures haven't worked, Morrow says, because businesses and consumers haven't questioned the value of medical services: Is this surgery really necessary? Are there other alternatives? What is the physician's success rate for this surgery? Are other physicians better? Are patients pleased with the effect of this surgery on their quality of life?

By determining the necessity of medical procedures and measuring outcomes—in effect, establishing "value"—Morrow says that patients will become choosy and health providers will have to compete on the basis of their performance. In other words, he says market forces will become an integral part of medical services, thereby reducing cost.

Although such notions are relatively new to the health care debate, Morrow's group isn't alone in its thinking. Some managed care programs, along with some HMOs and PPOs, already try to implement value systems and, according to Marianne Miller, economist at the Minnesota Department of Health, the federal government is spending millions of dollars studying the effects of such plans.

Stripping away unnecessary medical treatment is probably the biggest hope for ultimately reducing medical costs, Miller believes. She says some federal studies suggest that as many as one-third of all hospitalizations may be unneeded; however, she quickly adds that it is one thing to say that 33 percent of hospitalizations could be avoided, it is quite another to tell those individual patients that they are not sick enough to be in a hospital and that they should go home.

Equity will be cheaper with efficiency in place

But talk of competition and market philosophy likely brings little solace to the nation's 37 million uninsured, many of whom are employed. Society still has a "moral and ethical duty" to its poor, according to Bryan Dowd, an associate professor in the division of health services research and policy at the University of Minnesota's School of Public Health. "There will always be a need to transfer income to poor people" for health care, Dowds says, especially for the sake of children, whose ability to succeed and contribute to society is, in large part, determined by their formative years.

But Dowd, who describes himself as an "unreconstructed market person," believes that the first order of business in health care reform should be matters relating to efficiency. With competitive measures in place, he says, health costs will be cheaper for all, and ultimately less income will have to be transferred to the country's poor. Equity will follow efficiency, he says, as a matter of order.

Markets, however, are no panacea, Dowd says. They fail in dispensing adequate consumer information, for example, but the government in turn fails by not addressing that shortfall. Instead of fixing market failures, government intervention manifests itself in other areas best left to the markets, he claims. For example, licensing laws for medical professionals such as nurse practitioners, physicians' assistants and nurse anesthetists are unduly restrictive, according to Dowd. People in those professions could perform many other tasks related to medical care, he says, that are now under the sole jurisdiction of a doctor or other specialists. "It's time that we crashed through our state licensing laws and let people do what they're capable of doing," he says.

Also, the government creates price distortions by allowing employer- sponsored tax-free health insurance, Dowd says. This is a regressive tax exemption, he says, because it makes insurance seem cheaper than it is, thereby encouraging overuse of insurance and actually raising insurance costs. He favors a plan that would give tax credit coupons to pay for health insurance—but only for the needy.

"Right now we give the biggest tax breaks to the most wealthy, which is not only inefficient but inequitable," Dowd says. "This is terrible from a social justice point of view and an economic point of view."

The calm before the storm

With the federal government standing aside on the health care issue, some states, despite budget constraints—and, in some cases, because of them—have taken their own initiative. All states, of which 49 are required by law to have balanced budgets, have generally been frustrated by what they see as out-of-control Medicaid costs and federally mandated expansion of programs. In many states, Medicaid is the single largest and one of the fastest growing items in their budgets.

To curb such cost increases while expanding its services to include more constituents, Oregon has developed a controversial plan that offers a limited amount of services to all of its poor, rather than all of its services to a minority. A certain level of funding is appropriated to the state health package and when the funds dwindle, the lowest-priority services are rescinded. The debate over that new program has reached the national level, but Oregon is perhaps accustomed to such notoriety. In 1987 the state instituted a policy that eliminated organ transplants for most Medicaid patients and put the money into prenatal care.

In Minnesota, a group of health care officials, business owners, academics and others worked over a year with the mission to develop a plan to provide access to health care for all state residents. The Minnesota Health Care Access Commission reports that 370,000 Minnesotans (8.6 percent of the population) are uninsured for all or part of the year; another 366,000 have individually purchased policies that often provide inadequate coverage. The Commission also says that 11,000 residents were denied health care last year because they lacked health insurance.

While not nearly as controversial as Oregon's plans, the Access Commission is drawing fire because it recommends the creation of a $248 million health plan at a time when the state is grappling with steep deficits. The Commission also made recommendations to reduce state expenditures in some areas and to otherwise reduce costs.

Morrow, of the Business Health Care Action Group, ultimately doesn't believe that rationing plans, like the one implemented in Oregon, will be successful because people won't accept them. And he believes that establishing funds to pay for the uninsured are premature, because fundamental problems in the health care industry have yet to be resolved.

Health care should not be predicated on entitlements, Morrow says, but on what is needed and what works—and ultimately the savings will follow. He advocates a system that makes judgments on the efficacy of certain medical procedures, pays a premium to those providers who are successful and ends the practice of those who fail.

"Our conclusions are inescapable," Morrow says. "Whether they're right, we'll see."

Miller, of Minnesota's Health Department, says drastic change within the health care system will probably occur only at the brink of disaster—when action is mandatory. She says she fears a worst-case scenario whereby businesses just start dropping health plans for their employees because the companies are on the verge of failure, prodding the federal government to move in and take over.

Ultimately, amid all the talk about efficiency, cost reduction and improved value, Miller says the question of equity looms ever larger. She says the country must engage in a national dialogue about its health care expectations. "We need to talk about death and dying, fairness, quality of life," she says, because medical inflation is not under control. "The trends are frightening," she says, and tough choices lie ahead.