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The following article appeared in Left Business Observer #57, February 1993. It was written by Doug Henwood, editor and publisher. It retains its copyright and may not be reprinted or redistributed in any form - print, electronic, facsimile, anything - without the permission of LBO.

Paying for health

Seventy years ago, no one worried about medical bills. Doctors were no match for disease and their fees reflected it. By the 1930s, scientific progress and a depression had changed that: unpayable bills became an obsession of both patients and providers. Faced with radical notions like national health insurance (NHI) and consumer-owned medical cooperatives, private hospitals invented Blue Cross and state medical societies, Blue Shield -- financing schemes designed to sustain provider control. Those moves calmed the waters. After World War II, unions, purged of their radical elements, gave up the struggle for NHI and settled for their private welfare states. Any remaining sentiment for public health insurance was snuffed 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 -- fueled a mighty inflation. Health care costs rose almost twice as general inflation during 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, meaning more inflation, 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 to 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 rightist putsch of the late 1970s, but medical inflation didn't. Reagan's response was to promote HMOs, competition, and corporate medicine, and to begin paying Medicare's hospital bills at a fixed rate per diagnosis, rather than writing a blank check. 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 the non-poor.

Now the Clintons are taking on health care finance. Before picking on their likely proposal, managed competition, a tour of the present mess.

Spendthrift Sam

No country comes near U.S. spending on health -- 12.4% of GDP in 1990, up to 14% in 1992 -- but no country gets so little for its money. Canada, #2 in the Organization for Economic Cooperation and Development (OECD), spent three-quarters as much the U.S.; Britain, half as much.

Only Turkey (35%) covers a smaller share of its health spending with state funds than the U.S. (42%); the OECD (ex-U.S.) average is over 75%. But since the U.S. 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 OECD 23.

Our health problem is mainly one of ballooning costs, not increased use. The U.S. was the only country to show a big acceleration in medical inflation from 1960s-70s averages to the 1980s. Health inflation has actually lagged the general kind in Sweden, Norway, and France. Since the division of U.S. 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 $800 billion we spend now isn't being spent well. In a study of seven countries, Barbara Starfield found the U.S. dead last in basic health indicators, and also dead last in a "satisfaction-expense" 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 public health, environment, and nutrition are ignored in favor 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 that many were uninsured for some period during the year. Why so expensive?

Defenders of the current system say 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 U.S. leads the world in coronary bypass operations and angioplasties (Roto-Rootering clogged arteries), even though many of them are medically pointless. Contrast that fervent embrace of big-ticket operations with the slow U.S. adoption of treating heart attacks with clot-dissolving drugs, a low-cost technique pioneered in European national health agencies.

Right-wingers 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 U.S. both spent just over 7% of GDP on health care. By 1990, the U.S. was up to 12.3%, vs. Canada's 9%.

The causes of health inflation lie instead in the fragmentation of the U.S. system. Thousands of governments are involved, as are thousands more private insurers, providers, suppliers -- and, increasingly, auditors and consultants. One study, by Steffie Woolhandler and David Himmelstein, estimates that U.S. 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 U.S. figures of 3.2% for Medicare and 12% for private insurers. Medicare's expenses are bloated by contracts with private insurers, who charge 7 times what it costs Canada to process claims.

But administrative costs are not the entire story. U.S. physicians earn 5.5 times the average salary, up from 4.5 in the late 1970s (despite an increase in the number of doctors per person), and well above Germany's 4 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 our fragmented providers can.

Who pays?

On average, people cover a fifth of the national health care bill out of their own pockets; the rest is paid by public and private insurance funds. Direct payments per family rose from 9.0% of income in 1980 to 11.7% in 1991, according to Families USA (which didn't report the more inclusive household). It's likely that workers bear part of the cost of their health insurance, like all fringe benefits, in the form of lower wages. But business demands for cost control, such as Chrysler's famous complaint about how its health costs are two to three times those of non-U.S. firms, suggest that they are feeling the bite, too.

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 noted RAND Corp. study of cost-sharing showed that while co-payments did discourage use, especially among the poor, it discouraged appropriate as much as inappropriate care. International comparisons are no more supportive. Only France comes close to the U.S. in imposing direct costs on patients; most countries 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 lay 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.


Green eyeshades

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 (like NHI or Social Security), 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 riskiest may not be able to find insurance at any price. Private insurers shun entire industries as too scary -- logging (accidents), physicians and lawyers (litigation), entertainment 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, too. So, they're getting more deeply 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 costs and treatment quality, but the U.S. system isn't at all sensible. In most countries, providers' overall records are monitored; in Canada, for example, doctors who overbill noticeably are singled out for review. In the U.S., 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 criteria.

Given decades of smears against "socialized medicine" -- that patients can't choose their doctors, and that bureaucrats will interfere with physicians' clinical judgments -- 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 in the 19th century, who gradually 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 minority of plans, however, are on the staff model, in which physicians are on-premises 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 vigorous 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 in second-floor walkups, keeping away the infirm, or by offering patients expensive psychiatric referrals only through an 800 number, since the distressed are unlikely to want to tell all to an operator.

By no means are all the nation's 550 HMOs awful, but suspicions persist that care isn't always the best. Membership turnover is very high, suggesting dissatisfaction, and necessitating 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. Managed competition

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 needs a more profound shakeup, Alain Enthoven, a professor of economics at Stanford who used to manage the whiz kids at McNamara's Pentagon, has elaborated a plan for the total transformation of the health system called "managed competition" (MC).

Enthoven argues that while societies are not obligated to provide completely equal health care to all, they are morally bound to deliver a "decent minimum." Since the free market cannot be relied on to perform this moral task, and since caveat emptor isn't an acceptable standard to govern life itself, much 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, all 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 or 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 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 would they serve, and how well? Annual enrollment 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 that competition be vigorous, 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, unpopular Thatcher-Major reform of the British National Health Service (NHS), a system Enthoven once described as frozen by egalitarianism. Though universal access is still guaranteed, egalitarianism's 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 semiprivatized, competitive providers.

Things haven't gone well. The system 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.


Liberal variant

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 Social Transformation of American Medicine, co-editor of The American Prospect, and Princeton professor on leave to advise Hillary Rodham Clinton). Rather than Enthoven's array of sponsors, Garamendi would set up large regional health insurance purchasing 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 grow 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 shakeout) for a limited number of plans, risk-adjusted premiums, tiering through income. Starr estimates this plan would require $53 billion 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 U.S. social welfare system, such as it is.Politics

A review of recent polls shows public opinion is surprisingly favorable 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 government 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, favors a universal, national, Canadian-style system, especially if it's 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; it's 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 or 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.

Radical coda

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 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 physician's 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 passive 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; insurance companies, hugely wealthy creditors of almost every economic actor; and drug companies, the most profitable legal business on earth.

First things first, however: a publicly funded, democratically controlled national health system organized on the basis of universal access and equal treatment for all.


Other countries, other systems

There are several ways of organizing a national health care system, ranging from complete public ownership to various public-private hybrids. Even the form of public ownership can vary, ranging from central government control (e.g., Britain) to local government (Sweden). In Germany and the Netherlands, coverage is universal, but it's financed through a variety of insurers, and a large private sector remains.

Though American yahoos frequently accuse Canada of socialized medicine (horrors!), only the financing is socialized. Patients choose doctors and hospitals, and physicians enjoy plenty of autonomy. Doctors are free to reject non-emergency patients and are reimbursed on a fee-for-service basis (at fees set through negotiations between provincial medical associations and the health ministry). Hospitals are run by independent boards, with medical staff determining admissions policies; budgets are hammered out jointly by local boards and the government. Provinces administer the system, and share the costs with the federal government; Ottawa pays 40%, the provinces, 60%. Administrative costs are 1.4% of expenditures, a fraction of U.S. levels. Coverage is comprehensive, universal, and available to all on the same terms and conditions. Coverage is from the first dollar: there are no co-payments or deductibles, and no money changes hands at the point of service.


Jobs paradox

If the U.S. spent at Canadian rates, our health bill would be $200 billion less. That's one way to look at it. Another way to look at the U.S. health setup is as a strange and furious job machine. An article by David R.H. Hiles in the November 1992 Monthly Labor Review points out that the health business added 3 million new jobs between 1980 and 1991, a sixth of the total new jobs over the period. Broad gains were reported in all sectors and occupations, and wages grew at 6 times the national average. Employment in hospitals grew 33%; in doctors' offices, 74%; in health insurance, 81%. U.S. hospital staff-to-patient ratios are twice those of Germany, three times Japan's. The benefits of office computerization over the period, Hiles points out, seem to have been more than eaten up by heavier paperwork imposed by managed care. Insurance companies hired thousands of auditors -- socially unnecessary jobs that are privately necessary to police a mad but profitable funding scheme. If by some fluke we should get a single-payer health system, the conversion might be just as dicey as the military-to-civilian kind.

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