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The Health Reform We Need & Are Not Getting

Barack Obama; drawing by John Springs

President Obama has placed health care reform high on his domestic agenda. He believes that a better health care system is essential for the nation’s economic recovery, so health reform “will not wait another year.” However, he has made only general proposals for reform, leaving Congress to work out the details of the legislation. The Democratic-led Congress has already passed some limited health legislation and its leaders say that they will put a comprehensive reform bill on the President’s desk before the end of this year.

Despite wide popular support for major reform, there will be powerful opposition. Most Republicans in Congress, allied with a small band of fiscally conservative “Blue Dog” Democrats, and most people in the for-profit health care industry will resist significant change. Many others with ideological objections to “big government” pay lip service to reform, but will balk at proposals that threaten private insurance. Compromises will be necessary, so it remains to be seen what legislation emerges and how effectively it addresses the basic problems of the US health system.1

The central problem is its expense. Health care in the US is about twice as expensive per capita as in other developed countries—nearly 17 percent of US GDP in 2008—and its costs are rising faster. High costs partly account for another huge health care problem—nearly 50 million people are uninsured, and the number is rapidly increasing. Economists say that the main reason for high costs is the ever-expanding use of expensive kinds of diagnosis and treatment, such as new drugs, diagnostic tests, imaging methods, and surgical procedures. Physicians in most other advanced countries have access to virtually the same resources, but use them less.

This difference is partly explained by a higher proportion of specialists in the US, who rely more than primary care physicians on expensive technical procedures for their livelihood, and in general are much more highly paid than primary care physicians—one reason why primary care doctors are now in short supply. The American College of Physicians attributes much of the high cost of the US health system to its relative excess of well-paid specialists and lack of primary care doctors.

There are also much greater financial incentives in the US to use technology, since health insurers pay doctors and clinical facilities most of what they charge for such services. In most advanced countries with universal coverage, the government determines how medical expenses are reimbursed, and the income of health care providers from technical services is therefore more modest. Also, relatively more practicing physicians in those countries are paid salaries, and relatively more hospitals (where most advanced technology is concentrated) are controlled by government budgets. This limits the availability and use of expensive technology.

Another very important but often overlooked reason for greater health expenditures in the US is that, more than in any other advanced country, large parts of the system are owned by investors. As a result, the entire system behaves like a profit-driven industry, as I described two years ago in my book A Second Opinion.2 The commercialization of our health system dates back only a few decades, but its consequences are profound. Investors now own about 20 percent of nonpublic general hospitals, almost all specialty hospitals, and most freestanding facilities for ambulatory patients, such as walk-in clinics, imaging centers, and ambulatory surgical centers. These medical care businesses, like other businesses, need profits to satisfy their investors, and for this purpose they use marketing and advertising, directed at physicians and the general public.

To remain competitive, many not-for-profit hospitals promote their bottom line just like their for-profit counterparts, vigorously advertising their facilities and services to the public. No other health care system is as focused on generating income as ours, and in no other country is medical care marketed and advertised so aggressively, as if it were just another commodity in trade. This increases health costs, while hospitals concentrate on the delivery of profitable, rather than effective, services. It also favors those who can pay over those who need medical care but can’t afford it.

The behavior of US physicians has been changed by the commercialization of medical care, and this too has increased costs. US medical practice has traditionally relied on fee-for-service, which has always given it some of the attributes and incentives of a business. However, the American Medical Association (AMA) maintained for many years that medical practice was a profession, not a business. The AMA’s ethical guidelines therefore advised physicians to limit their income to reasonable earnings from the care of patients, and to refrain from advertising and from entering financial arrangements with drug and device manufacturers. Those restrictions were lifted after the US Supreme Court decided in 1975 that lawyers, and by extension members of other professions, including physicians, are engaged in interstate commerce and therefore must be subject to antitrust law (from which they had largely been exempt).3

This decision had an enormous effect on the medical profession, but its consequences have received relatively little public attention. Although the courts did not initiate the commercialization of medicine, they certainly accelerated it and gave it legal justification. In 1980, after medical organizations lost some costly antitrust trials, in which they were accused of such offenses as limiting doctor fees or denying staff privileges, the AMA changed its ethical guidelines, declaring medicine to be both a business and a profession. This lowered the AMA’s barriers to the commercialization of medical practice, allowing physicians to participate in any legal profit-making business arrangement that did not harm patients.

Nearly a half-century ago, Stanford economics professor Kenneth Arrow, later a Nobel laureate, convincingly argued that medical care cannot conform to market laws because patients are not ordinary consumers and doctors are not ordinary vendors.4 He said that sick or injured patients must rely on physicians in ways fundamentally different from the price-driven relation between buyers and sellers in an ordinary market. This argument implied that, contrary to the assumptions of antitrust law, market competition among physicians cannot be expected to lower medical prices. And since physicians influence decisions to use medical services far more than patients do, the volume and types of services provided to patients—and hence total health costs—need to be controlled by forces other than the market, such as professional standards and government regulation. But Arrow’s argument was largely ignored in the rush to exploit health care for commercial purposes that ensued after the passage of Medicare and Medicaid in 1965.

The effects of investor ownership on health costs are perhaps most evident in the US private insurance system, which covers about 170 million people under age sixty-five—most of them through employment-based private plans. The great majority of private health insurers today, such as Aetna and Cigna, are investor-owned businesses. Most of these were established just a few decades ago, when—as a result of the rapid expansion of employment-based insurance—huge amounts of money began to flow into health care, creating profitable opportunities for investors.

Profits and management expenses take at least 10 to 20 percent of the premiums charged by investor-owned plans, including the costs of selecting those they will insure, whereas the overhead costs of Medicare—a government-run insurance plan covering everyone sixty-five and older—are about 3 percent. When private insurance companies provide coverage for Medicare patients (as in the Medicare Advantage plans), they cost the US government about 13 percent more than standard Medicare coverage.

In comparison with public insurance, a much smaller fraction of private insurance premiums goes to the actual provision of care, and the cost of providing acceptable care for those under sixty-five is probably much higher than if the same population were covered by Medicare. The private US health insurance industry has revenues from premiums of at least $500 billion, so its business overhead and profits add many billions to the cost of health care. Furthermore, the overhead costs of physicians and hospitals, whose offices must deal with the red tape of multiple private insurance companies when billing and collecting for services, add substantially to the expense these insurers inflict on the US system.

When considered in the light of what has been said about health costs, the proposals now being debated in Washington seem to be missing the main target. They will expand insurance coverage in the short term, which is certainly needed, but they will create a system even less affordable than at present.

Consider, first, the health proposals made in late February by President Obama in his budget message (most of which were also part of his campaign platform). He stressed the need to cover the uninsured and reduce the costs of health insurance. He suggested that people should not be locked into their jobs just to secure health coverage, that they should have a choice of health plans and physicians, and should be able to keep their employment-based plans if they wished, but should have other options. To reduce costs he urged elimination of high administrative expenses, unnecessary tests and services, and other inefficiencies. He also advocated more use of electronic records and the development of data on the effectiveness of specific medical interventions. He expected that these measures would not only improve the reformed system but also help it to pay for itself and maintain “fiscal sustainability.”

The coverage problem had already been partially addressed through the Recovery Act of 2009, signed by the President on February 17, which provides tax credits for the recently unemployed to help them keep their health insurance. Coverage had been increased further by separate legislation reauthorizing the Children’s Health Insurance Program (CHIP), which includes funds to insure an additional four million children under Medicaid—mainly children from poor families.

The Recovery Act also provides funds to improve the health care system and control costs. It authorizes $19 billion to support computerizing health records and about $1 billion for preventive public health programs (such as control of smoking and obesity), as well as community clinics and case management. As he said in his budget message, Obama believes that these initiatives will in the long run result in more efficient and less expensive care, although many people would remain uninsured. So beyond the already enacted measures, the President requested a reserve fund of more than $630 billion over ten years for health reform, most of which would expand and improve health insurance coverage.

The President proposed to finance half of his health expenditures over the next ten years through increased taxes on the wealthy, and half through savings from improved medical care. He also proposed to save money by reducing excessive payments to private insurers who cover Medicare beneficiaries (Medicare Advantage plans); by reducing drug prices and encouraging the use of generics; and by curtailing fraudulent billing practices.

These objectives are laudable, but as many knowledgeable authorities—including the Congressional Budget Office—have pointed out, there is very little evidence that the President’s initiatives would actually produce substantial savings. Whatever improvements these measures may make in the quality and efficiency of care—and they could well be significant—they are unlikely, over the next ten years, to generate the $300 billion in savings assumed by the President’s budget. And even if such savings were to be realized, most health economists believe that universal coverage would cost over twice what Obama allocated in his budget, and that does not count the cost of medical inflation.

  1. 1

    I briefly summarized my view of the health system’s problems in an earlier commentary on the McCain and Obama campaigns, but an assessment of the legislative remedies now being discussed requires a deeper analysis of what’s wrong with US health care. See “McCain, Obama, and the National Health,” The New York Review, November 6, 2008.

  2. 2

    A Second Opinion: Rescuing America’s Health Care: A Plan for Universal Coverage Serving Patients over Profit (PublicAffairs, 2007).

  3. 3

    Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975).

  4. 4

    Kenneth J. Arrow, “Uncertainty and the Welfare Economics of Medical Care,” The American Economic Review, Vol. 53, No. 5 (December 1963).

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