The medical-industrial
THE issue that increasingly dominates discussion of economic reform in the
International Viewpoint #244 April 1993
SEVENTY years ago no one worried much about medical bills.
USA is that of health care costs. Now escalating at 12-15% annually, these costs,
Doctors were no match for if not checked, will make any reduction of the government deficit or a return to disease and their fees reflected it.
By the 1930s, scientific progress
Grassroots movements are springing up in support of a "single-payer" health and a depression had changed service in which the government would function as the insurer. The Clinton that: unpayable bills became an administration and the medical elites are negotiating some form of "managed competition" to be run by the existing, fantastically profitable and wasteful privaobsession of both patients and providers.
The United States is the only advanced capitalist state in the world without national health care. The ruinous social and economic consequences of this problem
DOUG HENWOOD are highlighted in the following analysis "Paying for Health" by Doug Henwood, editor and publisher of a well-regarded newsletter Left Business Observer. What follows is an abridged version of the essay that appeared in the February 16,
Readers who wish to follow the US economy on a regular basis should subscri-
F
ACED with radical notions be to this valuable newsletter, which is available by subscription for $20 a year like National Health Insuran-
(11 issues) for individuals and $50 per year for institutions. Write to: LBO, 250 W.
ce (NHI) and consumer-
85 Street, New York, NY 10024-3217, USA. - Doug Finkel * owned medical cooperatives, private hospitals invented Blue Cross and state medical societies, Blue Shield, financing schemes designed to preserve provider control.
After World War 2, unions, purged of their radical elements, gave up the struggle for NHI and settled for their private welfare schemes. Any remaining sentiment for public health insurance was snuffed out in the anti-Red mania.
Though health costs receded as a political issue, billions in new insurance dollars and the curious economy of medical technology - it's the only kind that gets more expensive with time - fuelled a mighty inflation. Health care costs rose almost twice as fast as general inflation in the 1950s and nearly as fast in the 1960s.
Agitation for NHI returned. Instead, the
Great Society gave us Medicare for the old and Medicaid for the poor.
Billions more were fed to the medical-industrial complex, which knows how to spend it, and intensified agitation for
NHI. Nixon responded with a new policy
— competition and corporate medicine.
Henceforth, subsidies would be available to create health maintenance organizations (HMOs) and firms were required to offer insured workers the option of joining one. Though early HMOs were organized in the spirit of medical cooperatives, the spirit of Nixon's HMOs was rationalization and cost control.
The idea of NHI was killed in the economic health virtually impossible.
te insurance corporations.
1993, issue of the newsletter. rightist putsch of the late 1970s, but medical inflation didn't die with it. Reagan's response was to promote HMOS, competition and corporate medicine and to begin paying Medicare's hospital bills at a fixed rate of diagnosis, rather than writing a blank cheque. It slowed hospital inflation, but non-hospital costs rose more quickly instead. Bush was only able to offer trivial, now forgotten schemes — vouchers for the poor and tax breaks for
Now the Clintons are taking on health care finance. Before looking at their likely proposal - managed competition let's take a tour of the present mess.
### Less for more
No country comes near US spending on health - 12.4% of Gross Domestic Product (GDP) in 1990 up to 14% in 1992. But no country gets so little for its money. Canada spent three quarters as much as the US; Britain half as much in percentage terms.
Only Turkey (35%) covers a smaller share of its health spending with state funds than the US (42%); the OECD average (without the US) is over 75%. But since the US health bill is so huge, that 42% public share accounts for almost as big a share of GDP (5.2%) as is seen in countries with national health systems. And that's just the public sector. Private spending here takes another 7.2% of GDP, slightly below the average total health bill, public and private, for the 23 countries of the OECD
Our health problem is mainly one of ballooning costs, not increased use. The US was the only country to show a big acceleration in medical inflation from 1960-70 averages to the 1980s. Health inflation has actually lagged behind the general kind in Sweden, Norway and France. Since the division of US spending among doctors, hospitals, drugs and the rest is little different from elsewhere, it's reasonable to conclude that every sector shares equally in the excess
Maybe 14% of GDP isn't too much to spend on health care; maybe a civilized society would spend even more. But there's no question that the $800bn we spend now isn't being spent well. In a study of seven countries, Barbara Starfield found that the US last in basic health indicators and also in a "satisfactionexpense" ratio (meaning we get the least satisfaction for our money). We have fewer doctors per 1,000 people than the OECD average and hospital stays are about half the average. Basic matters of
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Dossier USA complex INTRODUCTION
International Viewpoint #244 April 1993 public health, environment and nutrition are ignored in favour of exotic, costly interventions. Infant mortality is a quarter again as high as it is in other G-7 countries and life expectancy shorter.
And over 35 million people, 14% of the population, went without health insurance for all of 1991 and about twice as many were uninsured for some period during the year.
Defenders of the current system say that our system is expensive because it's the best in the world, and argue that reform could, in the words of Texas Rep. Dick Armey, "sacrifice quality for the sake of access to all". Armey can't tell complexity from quality. The US leads the world in coronary by-pass operations and angioplasties (cleaning out clogged arteries) even though many of them are medically pointless.
Contrast that fervent embrace of highly expensive operations with the slow US adoption of treating heart attacks with clot-dissolving drugs, a low-cost technique pioneered in European national health agencies.
Rightwingers argue that excessive government involvement and insufficiently developed market mechanisms are also at fault — even though we have the least statist system in the First World and health inflation has worsened since competition became official policy in the 1970s. When Canada adopted its publicly financed system in 1971, it and the US both spent just over 7% of GDP on health care. By 1990, the US was up to 12.3%
The cause of health inflation lies instead in the fragmentation of the US system. Thousands of governments are involved, as are thousands more private insurers, providers, suppliers - and increasingly, auditors and consultants.
A nasty swelling
One study, by Steffie Woolhandler and David Himmelstein, estimates that US administrative costs are three to four times Canada's and account for half the spending difference between the two. Canadian hospitals have practically no billing staffs, and since the provincial authorities are the only insurers, insurance overhead is minimal.
Canada's health plans devote 0.9% of spending to overhead, compared to US figures of 3.2% for Medicare and 12% for private insurers. Medicare's expenses are bloated by contracts with private insurers, who charge seven times what it costs Canada to process claims.
But administrative costs are not the 22 entire story. US physicians earn 5.5 times the average salary, up from 4.5 times in the late 1970s (despite an increase in the number of doctors per person), and well above Germany's four times, Canada's 3.5 and Japan's 2.5. And drug costs are higher here than elsewhere; national services drive a much harder bargain with producers than fragmented providers can.
On average people cover a fifth of the national health care bill out of their own pocket; the rest is paid by public and private insurance funds. Direct payments per family rose from 9% of income in 1980 to 11.7% in 1991, according to Families USA (which didn't report on the more inclusive household).
It's likely that workers bear part of the costs of their health insurance, like all fringe benefits, in the form of lower wages. But business demands for cost control, such as Chrysler's complaint about how its health costs are two to three times those of non-US firms suggest that they are feeling the bite, too.
### Discouraging use
Mainstream reformers put great stock in making consumers pay more, hoping they'll think twice before visiting the doctor. This is a crude strategy. A RANDcorp study of cost-sharing showed that while co-payments did discourage use, it discouraged appropriate as much as inappropriate care. International comparisons are no more supportive. Only France comes close to the US in imposing direct costs on patients, most impose next to none and spend far less.
Health care is even more distant from the competitive market models of official economics than the rest of the real world. Entry into the provider business is strictly regulated by government and professional associations, so competition is limited. People are disinclined to pinch pennies when their lives are at stake, so usual cost-minimizing logic doesn't apply especially if a third party is paying the bills.
Since people have little idea of how to treat illness they have no choice but to entrust their fate to expert agents who are supposed to act in their patients' best interests, but who have their own interests too. Under fee-for-service (FFS) medicine, the more clinicians do, the more money they make. It would be hard to design a more inflation prone system.
As costs have risen, private insurers have gotten pickier, about whom they'll cover, pointing up some basic contradictions in the nature of private insurance. In general, insurance exists to limit individual risks by spreading costs across a large population. But it takes several forms. At one extreme is public social insurance whose principles are universality and egalitarianism. At the other is private, profit-maximizing insurance, which wants nothing to do with equality and universality.
Instead, premiums are set according to the riskiness of the insured, and the most at risk may not be able to find insurance at any price. Private insurers shun entire industries as too scary — logging (accidents), physicians and lawyers (litigation), entertainments and sports (drugs, sex, fast cars), barbers, beauticians and decorators (AIDS). They review contracts regularly and dump people who get sick.
Their ideal client is one who never submits a claim. But since few clients can live up to that ideal, insurers have to control costs after illness strikes. So they're getting more involved in clinical affairs through something called managed care.
Managed care describes a variety of private price- and use-control strategies practiced by insurers and HMOs including limits on patient choices of doctors and hospitals, extensive reviews of treatment and mandatory second opinions on surgery. Of course, any sensible cost control strategy would have to review providers for cost and treatment quality, but the US system isn't sensible. In most countries, providers overall records are monitored; in Canada, for example, doctors who overbill noticeably are singled out for review.
In the US, however, payers review individual cases and procedures, an inefficient and secretive method. Prudential's managed care plan in New Jersey employs a staff of 200 to cover 110,000 people, about as many as work for a Canadian provincial health plan covering 1.5 million. And under managed care, standards are set quietly by private institutions on financial criteria rather than at least quasi-publicly on more democratic
Assembly line medicine
Given decades of smears against "socialized medicine" — that patients can't choose their doctors and that bureaucrats will interfere with physicians' clinical judgements — managed care is an amazing development. Private reviewers have turned out to be more intrusive than any public system would have been. Doctors now seem like the mechanics of the 19th century who gra-
International Viewpoint #244 April 1993 dually lost control over their jobs, skills and tools to corporations. Management science has only begun to break down the physician's job into assembly line components.
Any Clintonization of the health system is likely to promote HMOs. Though HMOs come in many forms, all offer some fixed set of benefits in return for a fixed monthly fee. Most HMOs take these fees and contract with a network of doctors in private or group practice to whom members are referred. A small mihority of plans, however, are on the staff model, in which physicians are onpremises salaried employees.
The fixed fee is supposed to encourage disease prevention rather than treatment (thus "health maintenance") and impose cost discipline on providers. There's little proof that HMOs do the preventive work, but they are vigourous users of cost control strategies; some even tie doctors' incomes to cost-cutting performance, a scary incentive from a patient's point of view.
And, like insurers, few HMOs can resist the temptation of cream-skimming - recruiting the healthy and avoiding the likely sick. Certain populations are preferred to others; in the words of a recent Paine Webber report, "HMOs do not function well... in largely rural areas or economically depressed inner cities. Rather, the HMO plan performs best in the light urban/suburban marketplace".
Some cream-skimming strategies can be quite inventive, like taking applications on second-floor walk-ups, keeping away the infirm, or by offering the patients expensive psychiatric referrals only through an operator number, since the distressed are unlikely to want to tell
The nation's 550 HMOs are not all awful, but suspicions persist that care isn't always the best. Membership turnover is very high, suggesting dissatisfaction and necessitates constant recruitment drives. A 1990 General Accounting Office study of care provided to Medicaid recipients by Chicago-area HMOs found that required preventive care wasn't being provided to children, and worried that incentive payments to cost-cutting doctors encouraged them to delay and deny care.
Most studies show that managed care and other competitive strategies have had little effect on cost inflation. HMO premiums are inflating at a rate only slightly behind everything else. At best, there are one-shot cost improvements, but inflation quickly returns. Realizing that the system requires a more profound shake-up, Alan Enthoven, a professor of economics at Stanford, who used to manage the whiz kids at McNamara's Pentagon, had elaborated a plan for the total transformation of the health system, called "managed competition" (MC).
A decent minimum
Enthoven argues that while societies are not obligated to provide completely equal health care for all, they are morally bound to deliver a "decent minimum". Since the free market cannot be relied upon to perform this moral task, collective action is in order. But without the discipline of the market, cost control and quality disciplines will be lacking. A hothouse market must be created and managed.
Though Enthoven has been refining MC since he first proposed it in 1977, its essence is unchanged. Large sponsors — the federal government in the original proposal, now larger employers and local governments — would negotiate with several large HMOs (a form Enthoven admires) and insurance companies who would offer a range of health plans for a fixed monthly fee. Choices would range from bare bones to the luxurious. All of us would be classified into risk groups — low, medium, high. Fees, then, would be determined by level of service and risk group.
Sponsors (employers of governments) would subsidize premium payments up to a fixed amount, after which the consumer or employer would pay on a sliding scale, depending on income. Consumers, including the working poor, would always have to pay something to remind them of costs. Employers not offering insurance would pay an 8% payroll tax, a cost Enthoven assumes will be taken out of wages. Government would pay premiums for the destitute, using funds from the wage-subsidized payroll tax — meaning the middle classes would pay for the poor. Costs would be controlled by competition among providers, not through price controls or negotiated budgets.
All this differs, Enthoven argues, from pure free market schemes in that sponsors and government must "manage" competition — setting standards, auditing care, requiring universal coverage and shopping around for the best deals for their members.
There's so much to criticize here. The contorted, contrived nature of MC reflects the conflict between the spirits of public and private insurance — the one egalitarian and universal, the other discriminating and restrictive. Though it promises to cover all, financing is regressive and tiering is built into the system. Higher premiums for the risky are supposed to compensate for requiring providers to accept them, but providers will doubtless attempt to deny care through queues, rudeness and other covert strategies.
The standard of the "decent minimum" is what Enthoven calls "costworthiness" — "a standard of care that equates marginal benefits and marginal costs for people of average incomes in that society". Translation: an indigent should be treated only if an average worker could earn the equivalent of that regimen's cost during the period of time by
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International Viewpoint #244 April 1993 which treatment lengthened the sick indigent's life.
MC theorists see a massive industry consolidation, with insurers and providers failing and merging by the thousands. This might reduce duplication and with it administrative costs, but that will be offset by the ex nihilo creation of an entirely new administrative structure, the sponsors.
Whose interests will they serve and how well? Annual enrolment means high turnover and heavy recruitment, which is expensive, disruptive and may lead plans to emphasize sizzle over steak. Enthoven argues that the number of plans must be kept to a tight range - enough so that competition is vigourous, but not so many as to cause fragmentation and redundancy. But according to a study by some of Enthoven's colleagues (Kronick et al.) only medium-sized and large metropolitan areas are densely populated enough to support the full-blown competition provided by three health plans, leaving out one third to two thirds of the population.
Managed competition comes from an economist's mind, not human experience. But one real world test of Enthoven's advice is the unwanted and unpopular Thatcher-Major reform of the British National Health Service (NHS), a system Enthoven once described as frozen by egalitarianism. Though universal access is guaranteed, egalitarianism is out, in its stead an internal market. Hospitals are now self-governing and physicians are more "responsible" for their incomes (see more patients and stint on treatment). Regional health authorities now contract for services with these semi-privatized, competitive providers. tem is in organizational disarray and financial crisis. Money was supposed to follow patients, instead, money has deserted city hospitals for cheaper suburban ones. Consequently, the city hospitals are slated for closing as waiting lists grow — happy news for Enthoven, who once argued that hospital closures should become as routine as plant closures. Bed shortages are the worst in history.
California insurance commissioner John Garamendi has proposed a soft version of MC which has been endorsed by John Judis and Paul Starr (author of the The Social Transformation of American Medicine, co-editor of The American Prospect and Princeton professor on leave to advise Hillary Clinton).
Rather than Enthoven's army of sponsors, Garamendi would set up large regional health insurance purchasing 24 cooperatives (HIPCs). The system would be financed by a payroll tax, with deductions to soften the blow for small businesses. Costs would be controlled by a global budget which could grown no more quickly than payroll tax revenues.
The single sponsor, tax financing and global budget make this liberal; the rest, however, is largely Enthoven's sponsors contracting with a handful of big providers (the insurers and HMOs that survive an industry shake-out) for a limited number of plans, risk-adjusted premiums, tiering through income. Starr estimates that this plan would require $53bn in new public spending, mainly for the uninsured, to be financed by a payroll tax. So, as with Enthoven, the financing burden would fall on working and middle class taxpayers — a pattern typical of the US welfare system, such as it is.
A review of recent polls shows public opinion is surprisingly favourable to NHI. People are quite worried about health care finance. Two-thirds fear they couldn't afford long-term care and almost half worry they couldn't finance a major illness. The public wants doctors and governments to set standards of care, not insurance companies or hospitals. Though answers are sensitive to wording and the population surveyed, a majority, sometimes a large one, favours a universal, national, Canadian-style system, especially if its financed by taxes on doctors, hospitals and $50,000+ households.
That's not what elite opinion - big business, its hired intellectuals and the New York Times editorial page — wants; they are lining up behind Enthoven. It's reasonable to guess that the Clintons will propose something like MC. The thousands of insurance companies and providers that would be doomed under MC are likely to complain, and they're the kind of people with friends in Congress. And if the public figures out that MC means more restrictions and more out-of-pocket costs a rebellion might ensue. The Clinton administration hasn't yet shown the political skill and nerve that it would take to get MC through should strong resistance develop.
Efficiency and access would best be served by a single-payer scheme, but preserving the private insurance industry will probably be more important to the Clintons.
Efficiency and access are important, but there's also the issue of Medicine under Capitalism, as Vincente Navarro called his 1976 book. Hospitals, like schools, are where the costs of poverty, social disintegration and the environmental and workplace dangers are paid. It's not surprising that the First world country with the most barbaric social policies should also have the highest health costs.
Also, as Navarro and colleagues argue, the liberal image of the medical profession - the high-minded professional mode celebrated by Arnold Relman, former editor of the New England Journal of Medicine and, more critically, Paul Starr, overlooks an awful lot.
It idealizes the remarkably successful physicians' cartel, which has kept incomes high, blocked universal coverage and retained an extraordinary degree of professional autonomy and it ignores the tight social links between physicians and the corporate upper class and their perch atop an extremely hierarchical pyramid of health workers.
It ignores too the commodification of disease; the attention to illness rather than the maintenance of health, the objectification of patients and their transformation into lumps of diseased meat, the focus on profitable capital-intensive treatments rather than unprofitable public health measures.
And it forgets that the modern health system was shaped not only by doctors but by hospitals and elite foundations whose boards and managers usually come from the corporate elite; the insurance companies, hugely wealthy creditors of almost every economic actor; and drug companies, the most profitable legal business on earth. *