Placebo Politics

The American Prospect vol. 11 no. 23, November 6, 2000.

Marcia Angell

Health care is back on the political front burner. Not that anyone is talking about a major overhaul, like the ill-fated Clinton plan that banished the issue from polite political discourse for nearly six years. Instead, both George W. Bush and Al Gore are targeting isolated pieces of the health care system: prescription drug benefits for seniors, coverage for the uninsured, and a bill of rights for enrollees in managed care plans. This is the kind of incrementalism now blessed by conventional wisdom--a fix here, a fix there, and eventually it will all add up to universal, affordable coverage.

The resurrection of health care as a political issue reflects three developments. First, after a few years of slowed inflation in the mid-1990s, health insurance premiums are again rising rapidly, partly due to soaring prescription drug costs. Second, despite our booming economy, more than 40 million people are still uninsured (although the number dropped slightly last year). Third--and most important politically--two demographic groups with high voter turnouts are demanding that something be done: Medicare beneficiaries hurting from escalating drug costs and middle-class employees fed up with the tricks of managed care--truncated hospital stays, limited choice of doctors, shrinking benefit packages, seemingly arbitrary denials of coverage, and increasing deductibles and co-payments. All of this is enough to get the attention of Bush and Gore, despite the hazards of being drawn into debate about a subject as mind-numbing and eye-glazing as the American health care system.

But comprehensive reform is thought to be out of the question, given the general belief that the Clinton plan failed because it was too sweeping. (I happen to disagree with this view; see Theda Skocpol's Boomerang for the full story.) Most have drawn the lesson--repeated like a mantra--that only incremental reforms have any chance of (a) being enacted and (b) working. Thus, the few reforms since the Clinton debacle have merely nibbled at the edges. The Kennedy-Kassebaum bill, for example, permits employees who leave their jobs to continue their health insurance, but is silent on how they can afford the stratospheric premiums that may be charged. Similarly, legislation mandating at least 24-hour hospital stays for childbirth doesn't speak to the general problem of ever-shorter hospital stays. It is in this spirit that Gore and Bush are gingerly attempting to address a few of the more glaring inadequacies of our health care system.

I am extremely skeptical that the sort of incrementalism embodied in the Bush and Gore proposals can work, even though they are targeting bigger pieces of the system than the earlier reforms. In fact, precisely because they are more ambitious yet still piecemeal, they would likely backfire. They would exacerbate the fragmentation, make the system even less efficient, and depress access to affordable, high-quality care. That is particularly true of Bush's proposals, which, in addition to being confused, rely far more on the private sector than Gore's. To understand this paradox, it is necessary to review some salient features of the American health care system.

An Unhealthy System

There is more than enough money in the system now to give Americans all the health care they need or could reasonably want--if it were distributed differently. We spend over $4,000 per capita on personal health care, about twice as much as Canada and the European countries (which cover all their citizens), and the gap is growing. Why is our system such a money sink? Not because our population is older or sicker. All the Western countries have aging populations vulnerable to nearly the same illnesses at roughly the same rates, and ours is actually younger than most. Nor is the reason that we get better outcomes. By all the usual measures of health--life expectancy, infant mortality, childhood immunization rate--we do worse than most Western countries. The only plausible explanation is how health care is financed and delivered. The American health care system is staggeringly wasteful and inflationary.

The United States is unique in treating health care as a market commodity distributed according to the ability to pay instead of as a social good distributed according to medical need. The fact that the system targets market transactions, not medical need, is highly inefficient because it requires constant tinkering to deal with the inevitable result: People who cannot pay still get sick and need to be taken care of.

Although health care is treated like a commodity, it is not traded in anything like a classical market. For one thing, it is largely paid for by third parties, not consumers themselves. Government foots about half the bill for personal health care, and employers about a third. Furthermore, health care is not a discretionary desire, like VCRs and computers. Someone with a brain tumor, for example, is not disposed to shop around for a low-priced neurosurgeon or to postpone the purchase until the kids graduate from college. Patients are dependent on their doctors' judgments as to whether and when they need care and what kind they need. The health care business, then, is highly protected from the usual market constraints, and the tug of war between doctors and insurers adds more inefficiency than it constrains costs.

Of course, third parties (mainly government) also pay for health care in other Western countries, but these countries do not pretend to have markets. Most have an overall ("global") health budget and highly coordinated systems of providing universal care financed through a single payer. The United States has no global budget and no coordination among the parts of the system. Instead, we have a nonsystem, a chaotic hodgepodge of payers, insurers, and providers that function independently and usually at cross-purposes.

For example, insurers and managed care plans compete primarily by developing strategies to attract young and healthy enrollees and to avoid those with chronic illnesses (shunting them off to someone else). They also limit coverage of the high-risk enrollees they do insure, and resist claims so that patients themselves pay as much of the bill as possible. But while such cost-shifting may lower medical costs for each business, it adds to administrative and marketing expenses and greatly increases the costs of the system as a whole. Not surprisingly, the United States has by far the highest overhead costs in the world, in addition to having the only health care system based on dodging sick people.

Despite managed care, the providers in this market--doctors and hospitals--are still largely paid on a piecework basis, that is, fee for service. Other countries do likewise, but we are distinguished by our skewing of fees to favor high-technology services delivered by highly paid specialists. As a result, we still have a surfeit of specialists doing too many expensive tests and procedures, and too few doctors spending time talking with patients.

The Clinton Plan and Its Aftermath

The Clinton plan was billed as a way to control health care inflation while achieving universal access. At the time, it was not so much the public as the third-party payers who were asking for relief. Employers claimed they could no longer afford the escalating costs of health benefits for their workers, and government saw health costs as a budget breaker. After the demise of the Clinton plan, employers turned to managed care to control costs, and it was then that the unbridled ascendancy of market ideology in health care began in earnest. The watchword was "Let the market work." Sure enough, health care became dominated by investor-owned managed care companies, and the market did indeed work--but not in the way most people hoped.

Managed care (of which HMOs are one form) reverses the financial incentives of fee-for-service medicine. Instead of doctors being paid on a piecework basis and thus being tempted to run up costs, managed care companies are paid a set premium for each enrollee. Note that enrollees and doctors are pretty much left out of the loop. The deal is not between them, but between employers, presumably acting as proxies for their workers, and the managed care plans for which the doctors work. But particularly in high-turnover industries, how much does your boss really care about your health? Employers have every incentive to enroll their employees in the cheapest plans consistent with reasonably good employee relations (which will matter less if unemployment rises). And managed care companies have every incentive to reduce medical services so they can keep more of the premiums as profits. Unfortunately, the surest ways to reduce services are to avoid enrolling the sick, to limit coverage, and to deny claims. Managed care under for-profit auspices contrasts radically with the original model of prepaid group health, which was nonprofit, inclusive, preventive, and physician-run.

For a few years in the mid-1990s, managed care seemed to work. That is, inflation in employers' health care costs was greatly slowed. (It was a somewhat different matter for employees, who found themselves picking up costs for more bits and pieces of their medical care.) But even though managed care worked, it did so with extraordinary inefficiency. Managed care companies regularly skim off a substantial amount of their premiums, somewhere between 10 and 30 percent, for administrative costs, marketing, and profits. Some of the rest is diverted to other businesses only indirectly related to health care that have entered the increasingly entrepreneurial health care market. These include brokers to cut deals, physician-management companies, companies to coordinate the care of specific illnesses, billing agencies, marketing consultants, information-management firms, and on and on. They, too, skim off their overhead costs and profits. Ultimately, only about half of the health care dollar makes its way to the doctors and hospitals that actually provide care, and they, too, have high overhead costs as a result of having to deal with multiple payers with different rules. (It is hard to understand how anyone familiar with the health care system can still believe in the myth of the greater efficiency of the private sector.)

Medicare is by far the most efficient and popular part of our health care system (with overhead costs of about 2 percent). Nevertheless, its costs are rising at an unsustainable rate because of the aging of the population and problems that stem in part from the fact that the program is embedded in the larger profit-driven system. In addition, doctors are paid fee for service, and despite some efforts to correct the problem, the fee schedule still preferentially rewards high-technology care delivered by specialists.

The Incremental Reforms of Bush and Gore

An open-ended and pluralistic health care system like ours may seem best tinkered with bit by bit. Since the whole thing is virtually impossible to grasp at once, why not just target whatever sticks out as most in need of fixing? But despite the seeming incoherence of our system, everything is still connected to everything else. Any piecemeal reforms can be offset by changes in other parts of the system as players move to protect their profits. Consider the reforms on the table.

Prescription Drug Benefits. Both Bush and Gore have offered incremental proposals to help Medicare beneficiaries with drug costs and also to mollify younger voters who worry that the program will be gutted by the time they are 65. The fact that Medicare does not cover outpatient drugs is an anachronism; when the program was crafted in 1965, drugs were cheap and there weren't as many. Now seniors are vulnerable to the rapidly escalating prices of the growing number of effective drugs on the market. Bush and Gore would have Medicare directly pay for all out-of-pocket drug costs above a certain level ($6,000 for Bush and $4,000 for Gore) and also for the drug costs of low-income seniors (Bush would begin with four-year block grants to the states for this purpose). Both candidates would pay for their proposals with a portion of the budget surplus plus increased premiums for beneficiaries, but not with an increase in the payroll tax that provides most of the funding for Medicare.

But here the similarities end. Bush would rely heavily on funneling subsidies through private insurers and managed care companies. He would encourage health plans to compete for seniors on the basis of price and choice of benefits, which would include the option of drug coverage. Medicare would pay at least 25 percent of the premiums for drug coverage, which would be set by the market, as would deductibles and co-payments. (Bush would add a drug benefit to the traditional Medicare program, but he is vague about who would be eligible for that or what the terms would be.) In contrast, Gore would rely on expanding federal programs or creating new ones. He would offer an optional drug benefit within the Medicare program for a premium starting at $25 per month. Under this benefit, seniors would receive 50 percent of their drug costs up to a ceiling of a few thousand dollars.

It is hard to take Bush's proposal seriously. He seems blissfully unaware that the private sector that he counts on so heavily is causing many of the problems he is ostensibly trying to solve. For starters, look at the record of the managed care industry in dealing with seniors. Because managed care was thought to be the way to control costs, the government tried (largely unsuccessfully) to encourage Medicare beneficiaries to enroll in HMOs. It originally set premiums at 95 percent of the average Medicare costs in a given region, and invited HMOs to compete for enrollees. That was in fact a substantial overpayment because HMOs enrolled younger and healthier seniors, whose costs were low. In addition, many beneficiaries would enroll in HMOs while they were relatively healthy (HMOs attracted them with broader benefit packages), then return to the traditional system if they became seriously ill and needed expensive care. This revolving door approach not only enabled beneficiaries to enjoy the best of both the managed care and fee-for-service worlds, but it also doubly rewarded the HMOs: First, they were assured of not having to care for their share of sick patients, and second, their premiums were pegged to the average cost of the fee-for-service system, which was driven up by sick people leaving HMOs. By the mid-1990s, it became clear that Medicare spent about 12 percent more for beneficiaries in HMOs than if the same people had been in the traditional program.

In 1997 the reimbursement formula was changed to make premiums better reflect the actual health status of enrollees, although as reported recently by the General Accounting Office and the Health and Human Services inspector general, health plans are still being overpaid for their Medicare enrollees. Nevertheless, with their profits curbed somewhat, many of these companies are deciding to get out of the Medicare business. Nearly two million seniors have been told to find other health plans or go back to the traditional Medicare program. In view of the record, how does Bush propose to get managed care companies to re-enter this market? There is only one answer--offer them more money (the 25 percent subsidy for drug benefits would not be enough). But since they are already being overpaid, that is supremely irrational.

Because Bush's proposals are so foolish, it is tempting to think that Gore's are entirely sensible, but that is not the case. Like Bush, Gore has not addressed a crucial issue in his drug proposals--the drug prices themselves. He blusters a little about drug prices in his campaign speeches, but offers nothing specific. Since neither candidate has said a word about any sort of price controls, apparently both of them would permit drug companies to continue setting their own prices. Yet to offer government subsidies of drug purchases without price controls is to guarantee that already-exorbitant drug prices will rise still higher. The drug companies do not need this windfall. As discussed by Merrill Goozner in the September 11 issue of TAP ["The Price Isn't Right"], the pharmaceutical industry is by far the most profitable in the United States (with one of the most powerful lobbies in Washington). It also already enjoys massive government subsidies, including research funded by the National Institutes of Health to develop drugs and patents to ensure noncompetition. Unlike Bush's plan, Gore's at least holds the potential for price controls since it would give Medicare such concentrated buying power that it could bargain for lower prices. That is why the pharmaceutical industry opposes the plan so vehemently.

Coverage for the Uninsured. Bush's proposal for covering the uninsured would provide tax credits of up to $2,000 per family to purchase private insurance (which would be paid in cash if the family does not pay that much income tax). But $2,000 would constitute less than half the cost of insurance for a family of four, and poor people could not afford to participate. Gore's approach to covering the uninsured is to make sure all eligible children are enrolled in Medicaid or the new state-run Children's Health Insurance Program (CHIP) for uninsured children. Eventually he would expand CHIP to cover the parents of children enrolled in it. Gore also favors permitting adults between ages 55 and 65 to buy into Medicare and giving them a tax credit on part of the premium.

Gore's reliance on CHIP underscores one of the most distressing aspects of our byzantine system: Even those who are eligible for coverage often don't get it. A recent survey showed that most parents of children who may qualify for Medicaid or CHIP are not even aware of it. The states have been so desultory in enrolling children in CHIP that most eligible children are not participating, and 40 states are now facing the prospect of returning the $1.9 billion in federal funds they received for the program. (Needless to say, they're objecting.) New York is dropping many of the children it did enroll because they should have been on Medicaid instead.

Patients' Rights. Legislation to protect patients' rights in managed care plans is the best example of the sort of incrementalism that is likely to be futile. Both Bush and Gore favor some sort of patients' rights bill to restore to patients and doctors control over medical decisions--control that has increasingly been assumed by employers and health plans. A Democrat-backed bill has been approved by the House, and a Republican-backed version by the Senate. They provide for appeals mechanisms when services are denied, for treatment in hospital emergency departments when patients plausibly believe it is warranted, and for doctors and patients to make decisions about referrals. The Republican bill excludes many health plans. Gore would allow malpractice lawsuits against HMOs. Bush would not.

But to the extent that such bills have teeth, they will add to the costs of health plans, which will simply pass those expenses along to employers by raising their premiums. Employers, however, are not required by law to offer any health care benefits at all. So instead of paying higher premiums, they might drop coverage altogether--or limit it sharply by capping their contributions. Employees, for their part, might just drop health insurance if most costs are shifted to them. So patients' rights legislation could swell the ranks of the underinsured and uninsured. At bottom, it is impossible to regulate health care in an employment-based system if employers can opt out.

A Different Incrementalism

Contrary to conventional wisdom, incremental changes of the sort proposed by both Bush and Gore will not work. What needs to be changed is the system itself. Like every other advanced country, we need a single-payer or consolidated-payer system to prevent both the widespread underinsurance and the cost-shifting.

Given the need to address the system as a whole and the uncertainties in doing so, a different brand of incrementalism could work: whole-scale reform gradually applied piecemeal. Suppose we decided that the best system would be to extend Medicare to everyone (essentially a Canadian-style system with twice the money). It could be done incrementally, at first including only the 55-65 age group. The benefit package could be made medically appropriate for various age groups, and the fee schedules could be changed to lessen the overuse of technology. After some experience, Medicare might later be extended down another decade to the 45-55 age group, and so on.

Another reasonable incremental approach would be to permit individual states to experiment with methods of achieving universal, affordable coverage. The "laboratory of the states" would essentially compete to demonstrate the best road to that goal. Democratic Representative John F. Tierney of Massachusetts has introduced a bill (HR 4412: States Right to Innovate in Health Care Act of 2000) that would authorize such demonstration projects. The bill would provide for up to 10 states to develop and implement their own plans for comprehensive health care. Those states would receive direct grants for developing their plans, and if a plan is approved, they would receive all federal funds that would otherwise flow into the state (including Medicare and Medicaid payments). They would also be granted waivers of federal statutory and administrative barriers. That seems to me to be an excellent start toward a promising kind of incremental approach: The overhaul is complete, but only within one region of the country.

Many questions would need to be answered. Should employers be among multiple payers contributing to a single pool? Or should they no longer be involved in health care at all? What should be the role, if any, of investor-owned health care businesses? How would hospitals and doctors be paid? Different states would devise different solutions. Eventually, our federal government might apply minimum national standards, as Canada's federal government did.

The public is alienated by a wasteful, profit-driven system that offers too little care for too much money, is much too hard to navigate, and leaves millions uninsured. To deal with the problems will require fundamental reform, which can be implemented gradually by age groups or by states. But it must be "sweeping" if it is to work. That may mean taking on the insurance and pharmaceutical industries directly--no small task. But if we are to have universal and affordable health care, that is what needs to be done. The money is already there. ¤