Health policy

CHAPTER 1Introduction
If everyone is in charge, then no one is in charge. Health policy is a problematic issue throughout the world, but it is particularly challenging in the United States, where there is no consensus about which government agency or social institution, if any, has the legitimate role of developing or implementing national health policy. The U.S. Constitution is silent on the subject of health and health care. Although its preamble promises “to promote the general Welfare,” the Tenth Amendment states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Neither education nor health care powers are specifically allotted to the federal government in the Constitution. The omission of health, however, cannot be attributed solely to the framers’ intent. They lived in a world in which one talked of “evil humours” and visited “barbers and churgeons.” Summertime yellow fever epidemics frequently disrupted the government in the capitol, Philadelphia. Relatively little was known about medicine when the Constitution was drafted in 1787. Jenner’s discovery of inoculation with cowpox to avoid smallpox did not come until 1796, and Pasteur’s germ theory and Roentgen’s X-rays came almost a lifetime later.
THE MANY ACTORS
Health care policy making in the United States is also very pluralistic. Any discussion of health policy must account for the fact that policy decisions are made at multiple levels of society:
• National government
• State and local governments
• Health care institutions
• Provider professionals
• Payer organizations (employers and insurers)
• Individuals (consumers).
The boxed tables randomly distributed throughout this chapter (Tables 1-2 through 1-7) provide samples of major health policy questions faced at each of these levels. Like most lists in this book, they are meant to be illustrative, not exhaustive.
In such a decentralized environment, the government may take a hands-on approach, treating health care as a public good, or a hands-off approach, favoring market-driven outcomes. The government’s stance and specific policies can also swing dramatically as political power shifts. For example, it may or may not encourage the entry of new institutions into the health sector to generate competition among providers as it did by supporting the introduction of family medicine departments and residency programs in medical schools. Any of these shifts can profoundly affect the professional’s work life.
This introductory chapter describes what health care policy is, how the policy analysis process works, and the different roles health professionals can play in setting and implementing health policy over time. The role of a policy analyst is described quite completely in the excerpt from the U.S. Office of Personnel Management Operating Manual displayed in Table 1-1. As you proceed through the book, you will likely note many parallels between that role description and the organization of this book, even though this book is meant to outline health policy analysis for health care professionals rather than cover the full training needs for a career in policy analysis.
We then provide an overview of some of the major policy issues facing health care in this country. Then we address how certain potentially confusing terms are employed throughout this book and suggest ways to integrate the material that you will be learning with your knowledge from other disciplines.
TABLE 1-1 Excerpts from OPM Operation Manual Qualification Standard for Policy Analysis Positions
The principal requirements for performing policy analysis functions are listed below, as appropriate to the position to be filled:
• Knowledge of a pertinent professional subject-matter field(s)….
• Knowledge of economic theories including micro-economics and the effect of proposed policies on production costs and prices, wages, resource allocation, or consumer behavior, and/or macro-economics and the effect of proposed policies on income and employment, investment, interest rates, and price level.
• Knowledge of public policy issues related to a subject-matter field.
• Knowledge of the executive/legislative decision making process.
• Knowledge of pertinent research and analytical methodology and ability to apply such techniques to policy issues, such as:
• Qualitative techniques, such as performing extensive inquiry into a wide variety of significant issues, problems, or proposals; determining data sources and relevance of findings and synthesizing information; evaluating tentative study findings and drawing logical conclusions; and identifying omissions, question-able assumptions, or inadequate data in the work of others.
• Quantitative methods, such as cost benefit analysis, design of computer simulation models and statistical analysis including survey methods and regression analysis.
• Knowledge of the programs or organizations and activities to assess the political and institutional environment in which decision are made and implemented.
• Skill in dealing with decision makers and their immediate staffs. Skill in interacting with other specialists and experts in the same or related fields.
• Ability to exercise judgment in all phases of analysis, ranging from sorting out the most important problems when dealing with voluminous amounts of information to ensure that the many facets of a policy issue are explored, to sifting evidence and developing feasible options or alternative proposals and anticipating policy consequences.
• Skill in effectively communicating highly complex technical material or highly complex issues that may have controversial findings, or both, using language appropriate to specialists and/or nonspecialists, facilitating the formulation of a decision.
• Skill in written communication to organize ideas and present findings in a logical manner with supporting, as well as adverse, criteria for specific issues, and to prepare material complicated by short deadlines and limited information.
• Skills in effective oral communication techniques to explain, justify, or discuss a variety of public issues requiring a logical presentation of appropriate facts and information or analysis.
• Ability to work effectively under pressure of tight time frames and rigid deadlines.
Source: http://www.opm.gov/qualifications/SEC-IV/A/GS-POLCY.HTM accessed 10/13/06. For more detail see Section IV-A (pp33-34) of the Operational Manual for Qualification Standards for General Schedule Positions.
TABLE 1-2 Illustrative Health Policy Issues at the U.S. Federal Level
• What population groups should receive subsidized coverage from tax revenues?
• How should the federal government participate in supporting health care for all when the Constitution does not include health care as a federal responsibility?
• How should the federal government support quality improvement efforts if state professional licensing and disciplinary boards are not addressing medical error rates effectively?
• The cost of malpractice insurance in some states threatens the supply of providers in some specialties and appears to raise the cost of care. What is the role of the federal government in avoiding the negative effects of these suits and awards?
• Progress in information technology implementation in health care has lagged behind most other information-intensive service sectors. Is this good or bad and what should the federal government do about it?
• What services should be covered under Medicare? Medicaid?
• How many health professionals in a subspecialty are sufficient? Who determines that and how do we respond to such findings?
THE SYSTEM IN THE UNITED STATES IS UNIQUE, BUT NOT UNPARALLELED
Many developed countries struggle with the burden of their social programs, including health care. Even in countries with a national health service, there have been recent efforts to decentralize them to make them more responsive to local needs and to tap into tax revenues available at the regional and local levels. Sometimes this transfer of decision-making power carries with it a privatization component. Medical care in the United Kingdom and Scandinavia provides examples of this, as does mental health care in a number of U.S. states. None of the other developed countries, however, spend as much per capita or as a percentage of the national income (gross domestic product) as the United States, and many of them have better health outcomes across the population. The overall results achieved in the United States seemingly should be better, given our relatively high expenditures.
Although this book does not emphasize comparative international health policy, it is important to understand that high-sounding goals such as the World Health Organization’s “Health For All by the Year 2000,” although promising much on paper, are still far from being achieved. Both developed and less-developed countries have taken rather different routes to more- or less-successful health care systems, leading in turn to different levels of costs and outcomes. These results have been achieved over decades of adaptation to the cultures and institutions of those countries and may or may not be models for the United States. The case study that follows Chapter 3 compares the health care systems in five industrialized nations.
All countries are aiming at targets that shift as basic science knowledge expands exponentially, new technologies become available, and new diseases and environmental threats emerge. Some countries are experimenting with one or more aspects of a market system for health care delivery, while still maintaining that health care is a basic human right. Although health care is not officially a right in the United States, all levels of government and the body politic are concerned about the increasing proportion of the population that lacks health insurance and is forced either to forgo care or to seek some form of public assistance. Even relatively conservative commentators argue for universal participation in national or state-level health insurance schemes, partly to disengage health care financing from employment relationships and partly to avoid adverse selection by employees and underwriting discrimination by insurers.
HEALTH CARE: WHAT IS IT?
The terms, health and health care, are used somewhat loosely in U.S. policy debates. Often, what people mean by health is absence of notable ailments. The World Health Organization, however, defines health as “a state of complete physical, mental and social well-being and not merely the absence of disease or infirmity.”
Similarly, when people utter the phrase the health care system, they often are talking about the system for financing and delivering personal medical services—what some refer to as illness care. The entire system that promotes health and wellness is actually much more complex. Other health systems, in addition to the system that delivers medical care, include public health, mental health, and oral health. Moreover, much of our health is the result of social determinants— such as housing, education, social capital, our natural environment and the way we construct the built environment around us—that are shaped by policy decisions made completely outside the health care system.
Most health care policy debates revolve around issues of medical care access, cost, and quality; however, there are organizational and individual proponents (such as The Blue Sky Initiative) of an approach to health policy where the goal is optimal health status. They would like to see a “move from a health care system to a health system that provides vertical, horizontal and longitudinal integration” (Peterson, 2006).
Thinking about health in terms of population outcomes can dramatically shift the way problems are defined and addressed. One example is identifying the leading causes of death. Using a disease model, the leading killers are ailments such as heart disease, cancer, stroke, injury, and lung disease, but McGinnis and Foege (1993), using a population-based, prevention-oriented perspective, identified the “real causes of death” as behaviors such as tobacco use, improper diet, a lack of physical activity, and alcohol misuse. They argued that some 88% of what we spend on health nationally pays for access to medical care, but in terms of influence on health status, it accounts for a mere 10%. This alternative view attributes 50% of our health status to our behaviors, 20% to genetics, and 20% to environmental factors. Yet only 4% of health spending goes to promoting healthy behaviors and 8% to all other nonmedical health-related activities (Robert Wood Johnson Foundation, 2000). Since the mid 1960s, public health spending as a percentage of overall spending on health care has fluctuated between 1% and 1.5% (Frist, 2002), and yet 25 years of the 30-year increase in life expectancy between 1900 and 1995 can be attributed to public health interventions.
Some examples used to illustrate points throughout this book draw on material from outside the realm of medical care finance and delivery. The case at the end of Chapter 10 discusses folic acid fortification of foods, an example of a population-based public health intervention, and the case in Chapter 12 looks at evidence-based, community-centered mental health interventions. This book, however, focuses mostly on access, cost, and quality issues related to personal medical services. That is due largely to the fact that the primary intended audience is health care professionals (people who operate primarily from inside the medical care system) and also to the simple fact that the United State is currently facing many salient and immediate issues related to health care access cost and quality. Readers are urged, however, to keep that intentional bias in mind and to think about how a big-picture view of health might change the way problems and solutions get identified. For instance, one of the health care finance reform proposals currently in vogue, and one discussed in several places in this book, is pay for performance, also know as pay for quality. Pay-for-performance programs provide financial incentives for providers to meet certain process and outcome measures. Kindig (2006, p. 2611) has proposed a “pay-for-population health performance system” that “would go beyond medical care to include financial incentives for the equally essential nonmedical care determinants of population health.”
HEALTH POLICY: WHAT IS IT?
Beyond the scope issues just described, most of us are clear on what health policy is about. Simply stated, health policy addresses questions such as:
• Where are we with our health care?
• How did we get here?
• Where do we want to be?
• What other alternatives are available here and throughout the world?
• What is likely to work in the future given our political processes?
• What roles should health professionals and ordinary citizens play in this process?
• How can we become better prepared for such roles?
Can we expect any given set of participants to agree on the answers to those questions? Of course not. Their perspectives vary. Their interests are often in conflict. A goal of this book is to encourage development of an objective, managerial approach to decision making—one that uses precise definitions of terms and relationships and carefully considers the key issues and actors on both sides before reaching individual conclusions. Because of this book’s management education approach, you should come away with a set of varied tools for interpreting and analyzing events, situations, and alternatives—tools that you can add to the skills that you have already developed through professional training and experience. You will not be asked to abandon what has worked, but you can probably do a better job with a systematic approach that allows you to use a broader array of methods that fit a greater variety of situations.
THE POLICY ANALYSIS PROCESS
Much of this text is organized around the stages of the policy analysis process, which are as follows:
• Problem identification: Why do we think we need to evaluate and possibly change the way we do things? What kind of actions are people asking for? What are the drivers that require that we commit limited resources to this policy area? What is the intended output? What is the expected result?
TABLE 1-3Illustrative Health Policy Issues at State and Local Levels
• What services should be provided and to whom under Medicaid options and waivers?
• How should the professional licensure be conducted so as to encourage quality of care, adequate access and appropriate competition?
• How should the public university system decide how many professionals to train to assure adequate access to all sections of the state? To all target groups?
• What should be the balance between local governance and state standards and mandates in the provision of public health department functions?
• What should be the state’s role in subsidizing care for the uninsured?
• What should be the roles of the state insurance regulations and oversight boards in assuring access to care for the general public and for special populations?
• How separate should the health care system and the mental health system continue to be? What about insurance parity?
• How do we undertake health care emergency planning: responses to floods, earthquakes, pandemics, or terrorism? What is the relationship between the state systems (public health and military) and local first-responders?
• Process definition: What is the current situation, and what is being done about it? What are people citing as the causes of concern? How valid are they? Who are the current actors and what are their roles? Why are the current results unsatisfactory to some? Are people framing the issue effectively? What are reasonable expectations for results over a relevant time horizon?
• Process analysis: What is actually happening in practice? How are outputs and outcomes measured and why? What are the resource inputs? Are they appropriate? Are the outputs distributed fairly? Where, how, and when might new technologies change this process within the relevant time horizon? What are the resource requirements of the really promising alternatives, and what will they cost? What are the impacts of these processes, such as persons served, lives saved, and hospital days avoided?
• Qualitative analysis: Identify and assess the nonquantitative issues related to valuation of benefits, and impacts on quality, equity, and distribution of outcomes.
• Evaluation: Weigh the evidence, quantitative and qualitative, and analyze for the following:
• Technical feasibility
• Political feasibility
• Economic and financial viability
• Recommendation
• Choice: Consider the value and ethical concerns that must carry weight in your decision and then choose a preferred policy to be recommended.
• Communication: Prepare to report your findings and conclusions convincingly.
SUPPORTING IMPLEMENTATION
During the design of a health policy study, throughout its conduct, and in its conclusion and reporting stage, the policy process must support its implementation. The objective of policy analysis is not a report but informed choices that lead to an improved health care system. That requires attention to the following:
• Implementation strategy: How do we manage the policy process to gain public, professional, and consumer support for change and backing of the most appropriate alternative(s)? How do we assure that key implementers and consumers buy into the process early enough? How do we mediate conflicting interests?
• Implementation planning: What steps do we need to take to assure successful implementation of the alternative chosen? How will we know that the chosen alternative was an improvement?
• Feedback to our policy processes: Have we been making the right choices? If not, why not? What new understandings should we take away that will lead to better and more efficient policy choices in the future?
HEALTH PROFESSIONALS AND THE POLICY PROCESS
One unusual aspect of health care in the United States is the low level of influence that health professionals generally have on policy formulation. Too often health professionals focus on what policy makers are doing to them, not on what they can contribute to the policy processes. Professionally prepared leadership is extremely important if policies are to be accepted and implemented effectively; therefore, we need to consider how and where professionals can exert leadership in enhancing the delivery of the services that are their work and their calling.
TABLE 1-4 Illustrative Health Policy Issues for Health Care Institutions
• How much charitable (uncompensated) care should we provide beyond that which is mandated?
• Should we try to encourage local organizations to participate in a National Health Information Network? Why?
• What efforts should we undertake to encourage local emergency planning?
• How should we go about increasing the proportion of the local population who volunteer as local organ donors?
• How can we rationalize the services provided by local providers, reducing duplication and waste, and still avoid charges of anticompetitive practices?
One reason for limited involvement of health care professionals in the United States has been the high opportunity cost of any time they spend on policy matters. In most countries of the world, a ministry of health oversees the national health system. Because government salaries for health professionals are relatively low, there is competition for higher administrative posts that offer better pay and better locations. Health professionals hold most key positions below the political level in the ministry, and physicians are the directors of most divisions, departments, and institutions. At one time, U.S. health department directors, as well as many hospital administrators, were expected to be medical doctors. During and after World War II, when physicians were in short supply, those institutions called on other administrators. The nation’s schools of public health trained new cadres of administrators. Rapidly rising physician income, especially after the introduction of Medicare and Medicaid in 1965, increased the demand for but not the supply of physician services. That meant that directly providing care paid so much better than administration that fewer health professionals sought health administration training. Educational institutions and health agencies responded by training health administrators without clinical credentials. As managed care has begun to constrain provider income and consolidation into larger organizations has expanded management incomes, professionals have taken a stronger interest in managerial roles. This interest has been reinforced by provider dissatisfaction with changes in professional autonomy, incomes, and working conditions that emerged under managed care. Health professionals are waking up to the need to participate in policy making, but their effective participation has been constrained by their lack of skills and confidence and by the other demands on their time.
BIG ISSUES TO KEEP OUR EYES ON
The United States has experienced rapid inflation in health care costs without attendant relative improvements in key health indicators such as infant mortality and life expectancy. One response has been to note that the United States and South Africa were the only two major countries without a national health service. This response, however, does not account for the fact that many highly developed countries with government health services are now struggling with similar and interrelated issues:
• Relationships between health care financing and employment
• Employment status, compensation, and autonomy of health professionals
• Equity in dealing with underserved populations
TABLE 1-5 Illustrative Health Policy Issues for Provider Professionals
• What services should be provided in addition to those normally provided by one’s specialty?
• What managed care organizations should I sign contracts with? Avoid?
• What should I do about the state of local emergency preparedness?
• What positions should I encourage my local, state, and national professional organizations to take on current health policy issues?
• Should I volunteer to serve on local or state committees assessing and advocating on health policy issues? Should I seek or accept a leadership role? How do I prepare for that possibility?
• Should I try to make my practice a leader in the adoption of health information technology? A late adopter?
• Should I go into (or stay in) a private practice or should I join a large group that is tied to a dominant delivery network (hospital, HMO, pharmacy chain, etc.)?
• Adequate supplies of trained health personnel
• Democratic political processes for reaching difficult health policy decisions
• Technology development and dissemination
• Impacts of social meta-issues, such as aging and terrorism, on health policy decisions.
Relationship Between Health Care Financing and Employment
Increasing international competition for jobs has highlighted the high costs of U.S. health care and the impact of concentrating those costs onto large employers who pay for health care for employees and retirees. These costs have been one factor leading international auto manufacturers to select sites in Canada over otherwise lower-cost locations in the southern United States. The proportion of workers covered at their place of employment has been falling in recent years, and this trend is likely to continue. Employers had sought to control costs through the use of managed-care organizations. As this effort seems to have reaped the bulk of its potential savings, more and more the burden is shifting to workers through having high individual premiums, having reduced subsidies for dependents’ coverage, moving jobs to independent contractor status, or dropping the benefit altogether under the rubric of consumer-centered health care.
One area where insurance coverage is opposed by many employers is the area of mental health. Many states have passed or tried to pass laws requiring parity of coverages for mental illness with coverages for physical illness. Washington State only did so in 2005. There is plenty of evidence that the cost of adding such services would not be all that expensive, but small business organizations have opposed parity legislation as costly to them. The existence of publicly funded community mental health centers has complicated the issue. Advocates for the mentally ill have pushed for parity legislation, not only to increase coverage, but also to reinforce the concept that mental illness is a brain disorder that should not be stigmatized and should be handled like any other illness.
Employment Status, Compensation, and Autonomy of Health Professionals
For many years, physicians and pharmacists were almost entirely independent business people. Hospitals employed some specialists (radiologists, pathologists, anesthesiologists), often under profit-sharing agreements, but medical practice acts in many states prohibited the use of employed physicians. With the movement toward managed care and the consolidation and industrialization taking place within the health care industry, more and more organizations began to buy practices and to serve customers that had previously turned to private practices and independent pharmacies. The ability of large organizations to buy and sell goods and services at deep discounts has forced more and more small operations to sell out. Increasingly, health care professionals are employed by large organizations and are experiencing conflicts involving their professional independence and autonomy. This has led to patient concerns about providers’ disinterestedness, a concern that has tended to weaken the status of the health professions.
Equity
Healthy People 2010, the federal strategic plan for improving health status, lists two overarching goals. The first is to increase both the quality and the number of years of life. The second is to reduce health disparities. The term health disparities refers to a disproportionate burden of disease, disability, and death among a population or group. Disparities can result from genetics, cultural factors, behaviors, social determinants (such as low socioeconomic status), lack of access to care, not seeking or being provided with care when it is accessible and available, and not receiving quality or culturally and linguistically appropriate care when it is accessed. Although the problem of health disparities is not unique to the United States—the term for this policy issue in much of the rest of the world is health equity—there is a growing recognition that health disparities are a serious national problem. The National Healthcare Disparities Report, released by the Agency for Healthcare Research and Quality in December 2003, identified disparities in health care for “priority populations”—women, children, older people, people of minority races, low-income groups, and people with special health care needs.
A report by the Washington State Board of Health cited examples of health disparities among minorities in that state, including the following (Finkbonner et al., 2001):
• The infant mortality rate for American Indians and African-Americans is more than double the rate for whites.
• African-Americans are more than three times as likely as whites to die from HIV/AIDS, whereas Hispanics are more than 1.5 times more likely to die from the virus.
• The rate of tuberculosis for Asian/Pacific Islanders is more than 15 times greater than it is for whites
• African-Americans are more than three times as likely to die from diabetes as whites; the death rate for American Indians/Alaskan Natives is 2.5 times higher, and for Hispanics, it is 1.5 times higher.
Throughout the world, providers tend to congregate where income and educational opportunities are best for them and their families; therefore, medical care has been plentiful in the major cities, especially those with medical education centers, and scarce in rural areas. The United States is no exception. Providers may also choose to direct their efforts toward consumers who have the greatest ability to pay. They gravitate toward more profitable specialties and may emphasize services that are most likely to generate income. All of these factors can contribute to disparities in care.
There have been many governmental and private programs to bring service to special populations, such as underserved rural areas, the posthospitalized mentally ill, American Indian and Alaskan Native villages, and people with AIDS. In these cases, the nation’s focus on a market system has been modified to overcome market failures in health care. Phelps (1997) pointed out that government involvement is one of the four features of the economics of health care delivery that differs from the delivery of most professional services. Three other economic differences that Phelps noted are uncertainty, information asymmetry, and externalities. All of these are explored further.
Adequate Supplies of Trained Health Personnel
Much of the cost of educating and training health professionals is borne by the public sector—public colleges and universities and hospitals are all involved in training health professionals. Because professionals tend to be compensated well above the national average and work for private as well as public companies and institutions, the level of government educational support is frequently called into question. Are we training the right number of the right people with the right degree of specialization for the right jobs? This is an issue in just about every other country because of disconnects between the educational system and the health care system. Because the federal government does not operate either system in the United States, we continue to live with the question of who is in charge of determining how many of what type need to be trained.
TABLE 1-6Illustrative Health Policy Issues for Payer Organizations (Employers and Insurers)
• What options should I offer as health benefits? Given that employees need choices, should I offer medical savings accounts?
• How much money and effort should we be allocating to prevention? What about the argument that people change plans so often that our investment in prevention won’t pay off?
• We have a lot of data on health care utilization? Should we mine that data and suggest choices of procedures? Providers? Lifestyle changes?
Democratic Political Processes for Reaching Difficult Health Policy Decisions
Time and time again, attempts to rationalize the health care system have been stymied by those who prefer the status quo ante. Opposition may be due to self-interest in some cases, but it can also be due to fundamental disagreements about how and where decisions are best made. The debate over the role of central government versus local units split the Founding Fathers and still is ongoing and so is the debate over whether the health care system needs considerable oversight or whether a suitable case can be made instead for relying on market approaches. In thinking about where the nexus for decision making about health care should lie in today’s United States, several complex economic, ideological, and managerial issues must be considered:
• Centralization versus decentralization: This is both a strategic and a tactical issue. Often it is considered in an ideological context with one side arguing that management is more responsive when it is closer to the people. The opposing side is likely to argue that local management is much more likely to be captured by local interest groups and is inefficient because of its small scale of operation.
• Unequal power in the markets: There are circumstances in health care that may limit the usual free market conditions of commerce. These include the following:
• Monopoly power: The ability of the seller to control a market. This is of concern where there are only one or two providers of a specific service in a community. Under federal and most states’ laws, obtaining a true monopoly position is illegal. In rural and other underserved areas, however, a lack of provider interest may allow a monopoly to exist.
• Monopsony power: A counterpart of monopoly in which the buyer rather than the seller has control of the market. Although this is not illegal, it is a market failure. The most common illustration in the United States has been the market power of the federal government. As a purchaser through Medicare, Medicaid, veterans’ health care programs such as CHAMPUS/TRICARE, and federal employee health insurance, it has been able to insist on maximum price discounts. In some locales, major managed-care organizations, such as the former Blue Cross and Blue Shield organizations, may also hold such pricing power.
• Collusion: Tacit or explicit agreement by a group (usually of sellers) to follow a common strategy. While joint price fixing is a crime, there are many other legal practices that may limit the supply of services. For example, one hospital in a two-hospital city may decide to stop offering obstetrical services after receiving assurances that the other hospital will in turn stop offering level I trauma care, allowing both to increase occupancy in their respective units and to keep the physicians in the community with those specialties from playing off one hospital against the other.
• Professionalism and information asymmetry: Information asymmetry occurs when one party to a transaction has more or better information about markets and values than the other. One of the underpinnings of professional status is the reality that the professional has information that is not possessed or understood by the client, thereby assuring information asymmetry. The client must then defer in decision making and the delivery of service to the professional.
• Public good vs. competitive market: The conditions of a competitive market require many buyers and many sellers, complete information for both buyers and sellers, and the capacity to make rational decisions on both sides. It can be argued that because of information asymmetry, the provider has a distinct advantage in the health care market, leading to market failure. Because the market is not functioning effectively and health care is a necessity for many, some argue that health care should be considered a public good to be regulated and perhaps provided by the government. If one assumes that health care is a public good and the market is failing, where and how should the government flex its economic and regulatory muscle? There are those who think that the market or consumer approach is the way to solve our health care national problems. Others argue that health care is not very adaptable to an unmanaged marketplace. That will be an important theme throughout any discussion of health policy analysis. Reagan (1999) referred to this as an aspect of the basic dilemma of health policy.
We in the United States want health care for everyone, and yet we prefer that it delivered through a virtually unregulated marketplace with lots of consumer choice. The unregulated marketplace proves to be a doubleedged sword. Those who want to support consumer responsibility and choice believe that careful shopping behavior will reduce costs. Current experience with medical tourism bears that out. On the other hand, the difficulties of those who do shop in gaining access to price and quality information suggest how far we are from suitable market conditions. Although one hears from strong advocates on one side about the need for universal coverage and on the other about consumer-driven markets, the vast bulk of this industry gradually industrializes and continues silently with its current course of growth with disconnectedness, high cost, withheld price and quality information, and dominance of local markets by powerful local actors.
Technology Development and Dissemination
TABLE 1-7 Illustrative Health Policy Issues for Individuals
• Should I participate in my employer’s health benefit plan and, if so, which option?
• How much should I plan to rely on Medicare when I retire in 2030? What alternative strategies should I be considering?
• Certain medical specialties are not available in my area. My county government wants to issue tax-exempt bonds to finance a new doctors’ office wing on the county hospital site. Should I support the referendum on the bonds?
A key issue in health policy is how to evaluate and rationally adopt new health care technologies. In manufacturing terms, how and when do we deploy the products of our research and development? Much of the recent increase in health care costs has been attributed to the introduction of health care technology, much of which leads to positive improvements in our ability to deal with disease but also costs more to provide.
Because the health care marketplace is highly fragmented with mostly local providers, individual providers cannot undertake research and development unless the development can be patented, as is the case with new drugs. Individual providers can only amortize the costs of such development over their own client base, and thus the cost would take too long to recoup. Alternatives are to turn to the federal government or to vendors who have access to multiple providers. Areas of research and development where government already plays some role in the United States include the following:
• Basic science: Our society has decided to fund basic research in health care through the National Institutes of Health and other government agencies. Much of this takes place in universities that receive grants to conduct proposed research efforts.
• Clinical applications: Some federal funding is available for clinical research, but much of it takes place with the support of vendors or individual or institutional providers. In areas, such as surgery, which often is not subject to Food and Drug Administration approval, a great deal of individual experimentation goes on and innovation spreads rapidly. In the new drug field, the Food and Drug Administration tightly controls experimentation. This helps assure consumer safety but slows the pace of innovation considerably.
• Testing for efficacy and safety: Here there is joint responsibility of the vendor, the provider, and government regulators, depending on the nature of the innovation. If the technology does not offer a “blockbuster” or high-volume good or service, there is limited support for this type of research. The Agency for Healthcare Research and Quality has the function of studying “evidence-based medicine” applied to existing treatments and practices, but its funding is not sufficient to do many needed studies.
Impact of Meta-Issues on the Health Policy Decisions
Health care policy making does not occur in a vacuum. It takes place in the context of society at large, and its debates reflect issues in the larger society. Health policy is profoundly influenced by value-driven issues that cut across the entire U.S. policy landscape. These include, especially, debates over the role of free versus managed market mechanisms and pro-life and right-todie ideologies. The battle over embryonic stem cell research is a case in point. The idea of using cells from fertilized eggs that were going to be thrown out anyway might not have attracted attention if it were not for the continuing debate about abortion, much of which turns on the definition of when life begins. If “life” begins at birth, then the opposition to early abortion—and the objection to using embryonic stem cells—is greatly weakened. If “life” begins with the union of the egg and sperm, then embryos are to be protected. Similarly, strong clashes among value frameworks affect other health care issues such as physician-assisted suicide or executions, contraception for minors, morning-after pills, concerns of institutional review boards, and direct-to-consumer pharmaceutical marketing.
THE ROAD AHEAD
Virtually all of these issues are revisited in the process chapters of this book. As central themes, we have developed brief cases offering 10 health policy examples that accompany their relevant chapters:
• International comparisons of health care systems
• A standard for culturally and linguistically appropriate care
• Subspecialty versus community hospitals
• Global medical coverage
• Marked small area variations in treatments
• The development of the National Health Information Network and regional health information organizations
• The Clinton health plan experience
• Folic acid fortification
• Voluntary versus governmental standards
• Evidence-based medicine and mental health.
These illustrate the types of issues and activities that cluster around health care policy debates and decisions and serve as examples for classroom discussion as we follow the stages of the policy analysis process.
The next five chapters (Part I) review the context in which American policy analysis is likely to take place, the status of our health system, and its apparent performance in recent years. Chapter 2 reviews where we are. Chapter 3 recounts how we in the United States got there, whereas Chapter 4 discusses what various actors would like to see occur. Chapter 5 outlines some of the government options that are under consideration for the country’s future course. Chapter 6 presents some alternative responses and initiatives open to institutions and professions. Discussion case studies are attached to Chapters 3 through 6. Part II presents specific aspects of the policy analysis process. Chapter 7 begins the presentation of this process with issues of process identification and definition. Chapters 8, 9, and 10 deal, respectively, with the three major areas of evaluation in the analysis process: (1) technological, (2) political, and (3) economic. Chapter 11 returns us to the additional value issues that dominate today’s headlines, whereas Chapter 12 points out how the policy analysis process must support the implementation of the policy after it is accepted. Discussion cases are attached to each of the six chapters in this part. Part III moves us to a focus on the roles of professions and professionals in the world of health policy. Chapter 13 reviews what is likely to work, given our political processes, and Chapter 14 outlines the ways that professionals can become further involved in the policy process. Chapter 15 wraps things up and suggests some strategies for staying involved with policy issues beyond the completion of this course of study.
CHAPTER 2Where Are We?
As more of us are being told we are sick, fewer of us are being told we are well. People need to think about the benefits and risks of increased diagnosis: the fundamental question they face is whether or not to become a patient (Welch et al., 2007, p. 2).
American health care is always in a state of flux as new scientific knowledge and clinical experience change our prescriptions for illness and wellness. As a society, we respond by changing the ways health care is delivered. The way we choose to provide those services increasingly impacts many aspects of our society, from health status to employment to economics to recreation to professional concerns to our perceptions of our own well-being. This chapter reviews the current status of the U.S. health care system from three points of view:
• Current outcomes and costs
• Industrializing structures for delivery
• Medicalization of our society.
CURRENT OUTCOMES AND COSTS
There is a growing consensus that not all is well with U.S. health care. Medicare trust funds are forecast to disappear over the next decade. Health care expenditures are projected to rise to around 20% of the gross domestic product (GDP) by 2015 (Borger et al., 2006). More and more small companies do not provide health benefits, whereas larger companies are shifting significant portions of health insurance costs onto employees and retirees. Politicians on both sides of the aisle are calling for change (Clinton, 2004; Gingrich, 2003; Gingrich & Kennedy, 2004). At the same time, health professionals’ control over health care is being threatened by outsiders calling for more reliance on government programs, more consumer-centered care, or both. Each recommendation has the potential to change markedly the roles and status of health care professionals.
High Comparative Costs and Low Comparative Outcomes
The United States spends far more on health care per capita and as a percentage of GDP than other developed countries, but does not seem to be much better off for it. Table 2-1 illustrates this by comparing a dozen countries on these two resource input dimensions and on two outcome dimensions, male life expectancy at birth and infant mortality rates. Similar rankings result when looking at a number of other outcome variables. The health care systems of these other countries offer virtually universal coverage but range from mostly private insurance to a national health service. The high U.S. costs and low U.S. outcomes do not seem to be associated with any one specific organizational or financing approach. Yet that is about all that experts seem to agree on.
Consumers in six countries (Australia, Canada, Germany, New Zealand, the United Kingdom, and the United States), especially those experiencing illness, were asked to rate their experience in terms of several factors (Davis et al., 2006; Frogner & Anderson, 2006):
• Patient safety: Perceived error rates were highest in the United States; laboratory errors highest in Canada.
• Effectiveness: The United States ranked best overall and best on preventive care and care for the chronically ill.
• Patient-centeredness: The United States ranked last in almost all respects.
• Timeliness of care: The United States and Germany were quick to receive specialist and elective surgical care, but the United States and Canada had the longest waits for primary care visits.
• Efficiency: U.S. patients reported use of emergency departments because a primary care provider was not available and also reported unavailability of medical records and test results and duplication of tests.
• Equity: The United States lagged in terms of perceived inequities for both poor and average income respondents.
The number of physician visits and hospital days per capita was lower in the United States than the Organisation for Economic Co-operation and Development median, and input prices for health care worker wages, hospital supplies, and drugs were much higher in the United States. Anderson et al. (2003) noted, “U.S. policy makers need to reflect on what Americans are getting for their greater health care spending.” They conclude, “It’s the prices, stupid.” Administrative costs for our system, estimated as high as 30% of overall health care costs, are also high when compared with the rest of the world (Woolhandler et al., 2003).
Overinsurance and Overutilization Arguments
Cannon and Tanner (2005) argued that the basic American problem is overutilization and would explain away comparative international differences because:
• Data definitions and collection methods are not comparable
• Health care is partly a consumption good that normally rises with income
• The U.S. infant mortality is increased by our efforts to save lowbirthweight infants that would be stillborn elsewhere
• There is little proven relationship between longevity and health care expenditures
• Our cost figures include the costs of medical research and innovation that are not incurred elsewhere.
They argue that disease-specific data are a better measure. On the mortality-to-incidence ratios for AIDS, breast cancer, colon cancer, and breast cancer, for example, the U.S. system looks very good.
Alan R. Hubbard (2006), assistant to the president for economic policy and director of the National Economic Council in the George W. Bush Administration, opened an April 3 New York Times Op-Ed column entitled “The Health of a Nation” by noting that private health care premiums had risen 73% in the most recent 5 years. He observed the following:
Health care is expensive because the vast majority of American consumers use it as if it were free. Health insurance policies with low deductibles insulate people from the cost of the medical care they use—so much so that they often do not even ask for prices (p. A17).
Ironically, relevant prices for major interventions are not usually available to consumers, even when they do ask for them.
A similar point of view has been expressed by R. Glenn Hubbard (2006), former chair of the Council of Economic Advisers, who saw rising health care costs as one of the biggest threats to the nation’s future prosperity. “Despite our national investment of $1.9 trillion, we get highly inefficient care—spectacular in certain respects, but rife with error, disorganized, and unaffordable or inaccessible to many.” He proposed that all health care costs be individual (rather than corporate) tax deductions. He believed this would accelerate the use of health savings accounts (HSAs). To support this, he argued for uniform national health insurance standards and open national health insurance markets. He used the banking reforms that allowed multistate banking as a positive parallel example and disagreed with the President’s Advisory Panel on Tax Reform, which had recommended a cap on the tax deductibility of employer purchases of health insurance. That recommendation was aimed at motivating employers to offer only basic, more affordable plans. He recommended giving consumers more choices of providers, greater use of health information technology, and medical liability law reforms (Cogan et al., 2005).
If the United States spends more on health care than any other nation without topnotch results, does that mean we are spending too much? The overspending can be in price or the quantity of services provided, probably some of both. U.S. health care wages are the highest in the world. Research also shows that an increased supply of health professionals leads to more utilization, some of which may be unwarranted, yet attempts to restrict the supply of specialists using licensing systems have led to charges of illegal restraint of trade. Like health care, professional education is a confusing mixture of a public good and a matter of personal consumption. There are many alternative ways—certificate of need regulations, for example—to try to control overuse or underuse by trying to influence the supply or demand for heath care services.
Cutler et al. (2006) concluded that if 50% of the increase in longevity between 1960 and 2000 is attributable to our increased medical care expenditures, we have gotten an acceptable return on our money. They suggest that the cost of a life year gained was reasonable, especially for those less than 65 years old. They caution, however, that the returns from added expenditures, especially for older people, have diminished over time.
Continued High Cost Inflation Rates
The Office of the Actuary, Centers for Medicare and Medicaid Services, and the Department of Health and Human Services are responsible for providing estimates used to assess the financial viability of those two huge government programs. Its report, National Health Care Expenditures Projections: 2005–2015, concludes that health care spending is likely to outstrip economic growth (GDP growth) throughout the next decade. Although there will be ups and down because of specific interventions such as Medicare Part D drug coverage, there will be little affect on aggregate health care spending, which will grow at a rate 2% higher than the overall economy. By 2015, it forecasts, national expenditures on health care will reach 20% of the GDP. The government share will gradually increase, leaving health expenditures financed about equally between government and private sources (Borger et al., 2006). Table 2-2 summarizes historical and forecast data on health expenditures in terms of dollars, dollars per capita, percentage of GDP, and price deflators for both health expenditures and GDP.
Except for the period from 1995 to 1998, the inflation rate for health care costs and health insurance premiums has been well above the inflation rate of the consumer price index and of workers’ earnings for at least the last 18 years, as Figure 2-1 illustrates. No wonder workers and employers feel squeezed by the rising costs of health care.
Disappearing Health Benefits
Employee health benefits (75% paid by employers, including government employers, in 2003) are disappearing at an increasing rate. Between 2000 and 2004, the percentage of insured nonolder people (0 to 64 years old) in employment-based health programs dropped 5% to 61%. In Indiana, Missouri, South Carolina, and Wisconsin during that period, the percentage dropped 9% to 10% (State Health Facts, 2005).
Official federal policy has been to encourage employees to participate in HSAs. The theory is that workers will choose health insurance coverage with high deductibles and coinsurance and will put the premium money saved into tax-exempt (income and interest) savings accounts that could be used in case of heavy expenses, for retirement income, or for other uses. These plans have gotten off the ground slowly because employers have been concerned about the problem of adverse selection, namely that younger, healthier employees would choose the HSA option, leaving employees who are at higher risk drawing from a different and smaller risk pool. Early returns from postal employees showed that the employees signing up for HSAs were much younger than those who chose or kept traditional coverage.
Some employers are also concerned about the “portability” feature of HSAs. If the worker leaves, the premium dollar saved goes with the worker rather than staying to help cover the remaining employees’ health insurance claims. Many employers see health benefits as a cost necessary to attract good employees and reduce employee turnover. Portability can run counter to that objective (Freudenheim, 2006a).
FIGURE 2-1 Cumulative Changes in Health Insurance Premiums, Overall Inflation, and Workers’ Earnings, 2000–2006

Source: “Employer Health Benefits 2006 Annual Survey—Chartpack,” (7451), The Henry J. Kaiser Family Foundation and Health Research & Educational Trust, September 2006.
Page 30 A MORE SYSTEMATIC EVALUATION
Taking stock of where we are means that we must evaluate our health care system systematically according to a number of criteria—cost, quality, outcomes, and equity. In 1980, Donabedian suggested the following classification when evaluating quality of care:
• Access
• Technical management
• Management of interpersonal relationships
• Continuity of care.
One could easily amplify these categories, but they are a useful starting point (McLaughlin, 1998). All of these factors involve tradeoffs with the cost of care and with one another.
Access and Availability
If you were in a serious auto accident, you would want the ambulance there fast to stabilize you and transport you to a trauma center. You would want that ambulance available. If we are in danger, we supposedly are guaranteed access. If the situation is life threatening and the hospital participates in Medicare or Medicaid, it must take us regardless of ability to pay. For less serious situations, for emergent medical conditions, and for prevention, there are no such guarantees. The local capacity to care for us and the ability to ensure that payment will be made (either through insurance coverage or out of pocket) are both necessary conditions of obtaining care. Unfortunately, a significant proportion of our population lacks access, availability, or both. Figure 2-2 shows the number of nonolder U.S. residents lacking health insurance coverage from 2000 through 2004. That number has risen from more then 39 million to more than 46 million. Although federal safety net spending, including Medicare, has increased 15% over the same period, spending in real dollar terms has expanded only slightly because of a 14% inflation in health care costs. Spending has failed to adjust for the additional uninsured, most of whom are young and poor (Holahan & Cook, 2005; Kaiser Commission on Medicaid, 2005). As employers shift more and more of the costs of health care to their employees or to public sector programs and as Congress and the Administration try to reduce budget deficits by cutting “entitlement programs,” access problems mount.
There are numerous other perceived access problems. Although coverage for children has improved and the older population receives considerable benefits from Medicare and Medicaid, the working population has become worse off. Even before employer coverage decreased, the biggest access problem was with the working poor—those who earn too much to qualify for Medicaid but have little or no access to employer-subsidized health insurance and are unable to pay their share of the costs, even when employment-based insurance is available. Even under subsidized programs such as the Maine and Massachusetts programs, there has been slow enrollment by the working poor (Belluck, 2007).
Many improvements in coverage for children came with the State Children’s Health Insurance Program in 1997 and have occurred despite reduced private insurance coverage for children. Racial disparities in insurance coverage remain, with the highest rate of uninsurance occurring among Hispanic children (21% in 2004) and African American children (13.4% in 2004). Overall, 11.3% of U.S. children remained uninsured throughout 2004, but 25.6% were uninsured at least part of the year. Children uninsured for all or part of the year were more than twice as likely to receive no medical care that year (SHADAC, 2006).
FIGURE 2-2 Number of Non-Elderly Americans Uninsured 2000–2005

Source: “Covering the Uninsured: Growing Need, Strained Resources” (#7429-02), The Henry J. Kaiser Family Foundation, January 2007.
Meanwhile, racial discrepancies still abound. Why are black infants as much as three times as likely to die as white infants in many states? Why was a child between 1 and 14 years old about three times as likely to die in 2003 in Alaska, Wyoming, and South Dakota as a child in New Hampshire, Massachusetts, or Rhode Island and more than twice as likely to die in Arkansas, Alabama, Oklahoma, New Mexico, and Mississippi? Why in the same year was the heart disease age-adjusted death rate in Mississippi and Oklahoma virtually twice what it was in Minnesota and some 30% above the national average (State Health Facts, 2006, 2007)?
One hopeful sign is the report from Centers for Disease Control and Prevention that there was no statistically significant difference in the vaccination rate of children 19 to 35 months in 2005, whether black, white, Hispanic, or Asian/Pacific Islander (Centers for Disease Control and Prevention, 2006).
Access—Structure
The United States stacks up pretty well in the developed world in terms of the total supply of services available, but services are distributed very unevenly. This is, however, a problem almost everywhere in the world. Urban centers attract trained personnel with job opportunities and educational and cultural opportunities for their families. Rural areas everywhere tend to lack personnel and facilities. That is why in 2004 a third of U.S. patients could see a primary care physician the same day; however, a sixth had to wait 6 or more days, and 16% reported going to the emergency room for a condition that could have been treated elsewhere if a regular doctor or source of care was available (Schoen et al., 2004). Over time, this rural problem has lessened as the supply has increased and primary care physicians and even some specialists have moved to smaller communities in response to market forces (Rosenthal et al., 2005).
Access—Process
For U.S. respondents, the limitations on access were perceived primarily as financial. When asked in 2001 about prescriptions not filled, doctor visits needed but not made, and treatments, tests, or follow-ups missed, all because of costs and problems paying medical bills, 35% to 40% of U.S. respondents with incomes below average reported experiencing such problems, almost double the rates in Australia, Canada, and New Zealand and six to nine times as large a proportion as in the United Kingdom. For the U.S. uninsured, the rate exceeded 50%. More than half of below-average income U.S. respondents and a quarter of those with above-average income were delaying dental work because of the cost; however, these rates were also high in all of the five countries except the United Kingdom (Blendon et al., 2002). People everywhere seem to use every reason possible to avoid going to dentist.
Access—Outcomes
Americans report that the barriers to health care access are predominantly economic. Morbidity in the nonolder population is concentrated in the lower socioeconomic strata. Certainly, high morbidity contributes to loss of income, but that effect is small compared with the effects of social status on access to care. A study of white, middle-class males in the United States and the United Kingdom showed that the Americans considered themselves less healthy, and thus, the problems apparently are not confined to one socioeconomic class (Banks et al., 2006).
Technical Management
The heaviest efforts to improve U.S. care have focused on the processes of care delivery. The 100K Lives campaign (see Case 11-1) was aimed at implementing effective measures that improve patient survival and quality of life. Still, our care system is wasteful in many ways, inconsistent in treatment and outcomes, and focused on revenue maximization rather than delivering maximum quality at a reasonable cost.
Technical Management—Structure
In the United States, most health professionals are well trained. Their credentials are carefully checked by the institutions where they work, and their licensing boards and certifying bodies require some continuing professional education. Entry by foreign physicians is relatively tightly controlled, with requirements for additional postgraduate training and testing before practicing; however, the results of this process still show providers and institutions to be poorly distributed. Poor states, rural areas, inner cities, and areas with high minority concentrations and low incomes have very different health care utilization rates from the more privileged areas of the country.
Technical Management—Process
Most systems to assure quality of care focus on the process of care delivery. They concentrate on the variability in treatment approaches among practices, among various areas of the country, and on failure to implement evidence-based practices. This focus on specific care processes, supported by measurement and reporting systems such as National Committee for Quality Assurance’s Health Plan Employer Data and Information Set system, has improved the rate of conformance in the areas measured, but there is still a long way to go.
One indicator of poor resource allocation and questionable quality is variability in medical care delivery from one area to another. Wennberg et al. (2002) showed, for example, that Medicare spent twice as much per enrollee in Miami than in Minneapolis without any apparent improvement in results. Miami patients might be sicker to start with, but case mix differences are unlikely to justify a doubling of average costs in a fee-for-service program. They suggest that there is relatively little variability where the medical evidence is strong and much more where the evidence is less so, such as with hospital-based care during the last 6 months of life.
Estimates of waste in the U.S. health care system run to 30% to 40% (Milstein, 2006). Not only are tests duplicated and medical records unavailable, but there is little attempt to optimize processes and coordinate activities to maximize the use of personnel. Each specialty and department tends to operate to meet its own preferences and maximize revenue, rather than to improve system efficiency. Staff departments assigned to improve processes have fallen by the wayside during cost-cutting drives (Sahney, 1993).
Technical Management—Outcomes
Much attention has been paid to medical error rates in recent years. The 2000 Institute of Medicine report To Err Is Human and the follow-up report Crossing the Quality Chasm focused the attention of the government and a reluctant medical profession on this problem (IOM, 2000, 2001). The Leapfrog Group, an employer-oriented organization, has suggested several measures that are in the process of being implemented, including computerized physician order entry and widespread use of intensive-care hospitalists. The experience with the 100K Lives program illustrates the magnitude of the improvements that can be achieved.
Management of Interpersonal Relationships
One area the American public has emphasized has been the importance of a relationship with a personal physician. Members of the public do not want to be told whom they may or may not see. They will even pay extra to have the relationships that they think suits their needs.
Management of Interpersonal Relationships—Structure
Americans rebelled at the idea that their health maintenance organizations (HMOs) could interfere with their existing relationships with their personal physicians. They clearly value that relationship where it exists; however, a substantial number of Americans report financial and spatial access problems and use less personal services such as emergency rooms or urgent care centers. Even those with relatively poor access to care triage their own care considerably, driving greater distances for more sophisticated care, if they believe a problem may be serious.
Management of Interpersonal Relationships—Process
Much of the expressed dissatisfaction with interpersonal relationships in U.S. health care has to do with the brevity of encounters. Patients feel rushed by their primary care providers, who are under pressure to see more patients as preferred provider contracts and government discount pricing have eroded income per visit. This weakens patients’ confidence that their providers have their welfare at heart. Clinically, it means many emotionally fraught issues—issues that used to be addressed when the provider listened carefully for the “by the way” comment toward the apparent end of the visit or at what some counselors call the “doorknob moment”—are no longer addressed.
Management of Interpersonal Relationships—Outcome
Increasingly, payers evaluate providers on the basis of questionnaires that measure consumers’ satisfaction with the interpersonal aspects of their encounters. For example, the Hospital CAPS 27-Item Survey Instrument asks questions such as these:
• During this hospital stay, how often did nurses and doctors treat you with courtesy and respect?
• During this hospital stay, how often did doctors and nurses listen carefully to you?
• During this hospital stay, did doctors, nurses, or other hospital staff talk to you about whether you would have the help you needed when you left the hospital?
Other Factors to Consider
Donabedian’s structure was developed ahead of most of our concerns about costs and at a time when the health community shared a more homogeneous value system; therefore, we must consider the additional factors relating to costs and values, especially notions of equity in health care delivery. The values issues will be addressed in subsequent chapters.
Costs—Structure
The unit costs of health care inputs are high in the United States, especially professional salaries, drugs prices, and the costs other medical supplies and devices. This is leading to a burgeoning international trade in health care. Costs would go even higher if unmet needs were addressed. There is a shortage almost everywhere of registered nurses, which may be constraining some hospital use. There are huge untapped needs in the field of child psychiatry and community psychiatry. People report being constrained on their consumption of psychotherapy because of the limitations on insurance reimbursement. We also know the poor do not see physicians and other providers as much as those with adequate insurance, although that can beg the question of whether the problem is overutilization by those with health insurance or underutilization by the poor or both. Given that a significant proportion of the poor are poor because of their health status, one would expect higher utilization on their part if they had sufficient insurance.
Costs—Process
Variability in processes is evident through differences in costs across areas and institutions. A substantial amount of gaming goes on between providers and the payment system. Where the system will not pay for a diagnosis and an office procedure on the same visit, a dermatologist may schedule two visits. If the patient needs multiple minor procedures but the payer will not pay for each one separately, there again may be as many visits as procedures, wasting patient time and payer money. Kleinke (2005) reported that the three large independent clinical laboratory firms have failed to adopt a common reporting system that is available to them because they do not want to support electronic data interchange that might avoid tens of billions of dollars in duplicate laboratory tests.
In an industry rife with dirty little secrets, this is health care’s dirtiest: Bad quality is good for business and the surest road to bad quality is bad information or no information. The various IT systems out there are expensive to buy, implement, and train staff to use, but this expense pales in comparison to all of the pricey and billable complications those systems would prevent…. As Walker et al. pointed out with this agonizing understatement, “Those who depend in subtle ways on redundancy could find such change costly.” This is health care’s second-dirtiest little secret: One organization’s unnecessary medical product or service is another’s revenue source (Kleinke, 2005, pp. 1250–1252).
Costs—Outcome
Earlier sections of this chapter provided information on health costs and outcomes for the United States compared with other developed nations. They also noted that perceived cost and inability to pay were major impediments to obtaining needed health care. The magnitude of those costs is also motivating major corporations to dismantle their employment-based insurance plans for employees, families, and retirees and keeping many smaller employers from offering health care plans to their staff.
COMPLEXITY
One barrier to access may be the complexity of publicly financed programs. Some programs are available only to those who at are below the federal poverty level (FPL), whereas other specific state programs can enroll families up to 300% of FPL. Programs also have requirements for cost-sharing with premiums, co-payments, and deductibles. For example, the Medicaid working group of the National Governors’ Association has suggested that the states be allowed to impose and enforce cost sharing provisions up to 5% of family income for those below 150% of FPL and 7.5% for those above 150% of FPL. Take a look at the implications of this as outlined in Table 2-3 for a minimum wage worker. First, note how complex it all is. Assume that a worker at a minimum wage job has the alternative of either accepting the typical employer plan with payroll deductible annual premium of $610 for personal coverage only and $2,713 for family coverage (approximately the national average). The latter is over 25% of one worker’s annual wages for the family. Even with two minimum wage workers in the family, the premium percentage is still large. The worker is likely to go without family coverage in just about every conceivable scenario unless there is highcost chronic illness in the family. The individual worker is not likely to pay the $610 premium either, as the $536 cost share is less than the premium. Table 2-3 oversimplifies things considerably. A person changing employers may experience gaps in coverage or may lose benefits if he or she works less than full time. There are waiting periods for new employees to become eligible, and complex descriptions of coverage that can be off-putting to many employees. Usually the company human resources department tries to help out with the enrollment process, but the economics of the process can only be understood in retrospect by most individuals. After all, very few of us plan to get sick.
The result is the following snapshot of insurance coverage as of 2004: employment-based insurance coverage, 174 million; individually purchased coverage, 27 million; Medicare coverage, 40 million; Medicaid coverage, 38 million; and uninsured, 46 million.
Compromise and Complexity
The political give and take that has marked the development of health care policy in the United States has left us with incredible financial complexity in our health system. Table 2-4 shows the primary federally financed programs, each of which has its own often-changing sets of regulations.
In the Medicaid program, we have at least 52 distinct governmental health care systems, one for each state, Puerto Rico, and the Virgin Islands.
There are more than 1,100 current waivers of the rules granted to individual state programs to allow expanded coverage and use of managed care approaches. Each state system has it own reimbursement rate, the Federal Medicaid Assistance Percentage, which is based on a complex formula involving income levels in the state. For 2006, this ranged from 50% federal payment in a number of wealthier states to 76% in Mississippi and 73.77% in Arkansas (Table 2-5).
Whether a person is eligible for Medicaid depends on the state that he or she lives in, as income eligibility and some coverages vary by state. For example, a pregnant woman may be covered in one state if her family income is at or below 133% of the FPL or 150% in some others, or 166% or 185% or 200% or 250% or 275%, depending on where she is enrolled (State Health Facts, 2007). Those covered by Medicaid may include the following:
• Categorically needy
• Families receiving Aid to Families with Dependent Children
• Pregnant women and children under 6 years old with family income up to 133% of the FPL
• Children ages 6 to 19 with family or caretaker incomes up to 100% of the FPL
•Supplemental Security Income (SSI) recipients or aged, blind, and disabled persons whose requirements are more restrictive than SSI
•Individuals and couples living in medical institutions who have monthly income up to 300% of the SSI income standard
•Medically needy individuals whose income or assets exceed those of the categorically needy
•If a program exists, it must cover pregnant women through 60-day postpartum period, children under 18, certain newborns for first year, and certain protected blind persons.
•The program has the option of covering:
•Selected groups of full-time students between 18 and 21 years old
•Caretakers (relatives and legal guardians) living with children
•Aged persons over 65 years old
•Blind persons
•Disabled persons meeting state or SSI standards
•Persons who would be eligible if they were not enrolled in an HMO
TABLE 2-4 Major Federal Programs
Medicaid is health insurance for the poor and disabled. It can cover pretty much all their medical bills, including nursing home care and drugs. Eligibility levels and services vary by state.
Medicare is health insurance for those over 65, some disabled younger than 65, and individuals with end–stage renal failure. It consists of three programs:
•Part A is hospital insurance and is covered by payroll taxes. In addition, it may cover hospice care, some home health care, and brief post-hospitalization nursing home care.
•Part B is medical insurance for which the premium due is deducted from one’s Social Security check. It pays parts of the physician’s and other providers’ fees, home health care, outpatient services, medically necessary physical and occupational therapy, and some home health services.
•Part D is insurance for prescription drugs coverage. Most participants pay a monthly premium to a private insurer for coverage under a plan-specific formulary.
Dual eligibles are poor disabled or elderly persons eligible for both Medicare and Medicaid. This population accounts for 18% and 16% of the respective beneficiaries of these two programs. Medicare pays for physician, prescription drug, and hospital care, while Medicaid pays the Medicare premiums and cost sharing and covers other health needs such as long-term care. Dual eligibles accounted for 42% of Medicaid costs in 2000.
•Special groups
•Medicare premiums, coinsurance, and deductibles may be covered for Medicare beneficiaries with incomes below 100% of FPL and resources below 200% of the SSI allowable. States can also cover groups up to 135% of that level.
•States may provide extended Medicaid eligibility while disabled persons learn to work and seek employment and as their conditions improve.
•Individuals with tuberculosis may be covered for tuberculosis-related treatments costs.
•Women with cervical or breast cancer may receive time-limited full coverage for cancer-related care.
•Long-term care (institutional and home health) is covered in all states, but eligibility requirements varying by state.
Until very recently, Medicaid covered prescription drugs, but Medicare did not. Medicare still does not cover long-term care.
TABLE 2-5 FY 2007 Federal Medicaid Assistance Percentage (FMAP) By State and Territory
Percentage Grouping
States and Territories in Category
50.0
California, Colorado, Connecticut, Delaware, Guam, Illinois, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New York, Virginia, Puerto Rico, Virgin Islands
50.01–50.99
Alaska, Nevada, Rhode Island, Washington, Wyoming
54.00–57.99
Hawaii, Michigan, Nebraska, Pennsylvania, Wisconsin,
58.00–60.99
Florida, Kansas, Ohio, Texas, Vermont
61.00–64.99
Georgia, Indiana, Iowa, Maine, Missouri, North Carolina, North Dakota, Oregon, South Dakota, Tennessee
65.00–67.99
Arizona
68.00–69.99
Alabama, Kentucky, Louisiana, Montana, Oklahoma, South Carolina
70.00–73.99
Arkansas, District of Columbia, Idaho, New Mexico, Utah, West Virginia
76.0
Mississippi
Data Source: Federal Register 2005 Vol. 70, No. 229, p. 71857.
LEADERSHIP AT THE STATE AND LOCAL LEVEL
A state is responsible for health insurance regulation as well as paying up to half the costs of Medicaid. Complexity is increased by the fact that each state has its own system of insurance regulation. Yet this has enabled a wide variety of innovative responses to access and cost issues at the state and local levels. Medicare is often the largest expenditure category in their budgets and is an open-ended commitment. Jurisdictions that rely heavily on property taxes have major problems dealing with such unpredictable expenditures. State and local governments also end up covering most of the acute care costs of the uninsured. The many approaches that they are using are discussed in Chapter 5.
The ERISA Barrier
Insurance regulation is a strong lever for mandating coverage and access and for taxing premiums to cover uncompensated care and fund high-risk pools; The Employee Retirement Income Security Act (ERISA) of 1974, however, exempted self-insured plans from much of state insurance law because self-funded insurers would not have insurance as a primary line of business. Generally, the courts have upheld this law. One exception is a 1995 Supreme Court decision allowing New York State to place a surcharge tax on health premiums, including self-insured plans, to cover uncompensated hospital care.
Park (2000) reported that in 1993 about half the nation’s insured workers were in self-insured plans (also called Section 125 plans), mostly in large companies. The exemption allows companies to offer a consistent benefit package to all of their employees in various states and to avoid state taxation of premiums and incurring the costs of regulation, as well as keeping any returns on their capital reserves. A self-funded company takes the underwriting risk for its own pool of generally healthy employees. These plans were most popular in the 1980s and early 1990s, but then lost market share as companies turned to managed care organizations to reduce costs. They are further losing share as companies cut back their plans and offer defined contribution plans, if anything at all.
ERISA constitutes a barrier to states attempting to achieve universal coverage. It leaves each state with two health care insurance systems, one regulated and one not. Other arguments against the ERISA exemption point to the possibility that unregulated plans might fail because of mismanagement, might abuse sick employees, and would put employees at a disadvantage whenever employers discontinue their self-funded plans.
INDUSTRIALIZING STRUCTURES FOR DELIVERY
The terms industrialization and occasionally commoditization keep coming up in current discussions of how to fix health care (Holstein, 2006). When applied to manufacturing early in the 20th Century, industrialization meant (1) breaking complex tasks performed by individuals down into simple tasks assigned to different members of a team and (2) studying, analyzing, and specifying the best way to do each of those tasks. The result was that work moved from the control and artistry of the craft person to a systematic process that was perhaps more efficient and less personal. Specialization in the industrialized system can imply deskilling for some and much higher, but narrower, skill levels for others. Managerial control of the system involves both allocating duties and specifying the right way to do them. Usually management includes two groups: (1) line managers who allocate the work and (2) staff specialists whose job is to specify and improve processes. Where the process is well defined and skill requirements can be reduced, labor substitution takes place—routine work is done by less expensive personnel with more limited training and less autonomy. Primary care physicians particularly report the frustration with their loss of autonomy and with the pressures for efficiency expressed as a measure of the number of patients seen (Rastegar, 2004).
Clayton Christensen has expressed the industrializing view most strongly.
In health care, rather than replicating the expensive expertise of Mount Sinai Medical Center or Mass General Hospital, or replicating the expensive expertise of doctors, we have to commoditize their expertise. That comes through the precise ability to diagnose the diseases that people have. Our ability to diagnose diseases is moving ahead at a breathtaking pace, but regulation and reimbursement are trapping the delivery of rules-based medicine in high-cost models.
Referring to the mastery of consumption he argued,
You had tuberculosis there, at least three types, and you had pneumonia. We thought it was all one disease. So the care had to be left with doctors because they were the ones with the training and judgment, but once you could precisely diagnose the cause of the disease, you could then develop a cure. It was so rules-based that you didn’t need a doctor any longer. Today a technician can diagnose those diseases and a nurse can treat them (Holstein, 2006).
Other symptoms of industrialization in health care include the following:
• More physicians employed (under management) rather than partners in practices
• Institutional emphasis on process development, including evidence-based medicine and continuous quality improvement
• External exchange of information on relative experience, outcome quality, and prices and costs
• Emphasis on process conformance and transparency, including preauthorizations, carve outs, utilization review, and clinical pathways.
• Increasing labor substitution
• Development of focused factories that specialize in a limited range of procedures, such as specialty hospitals and ambulatory surgery centers
• Increasing fragmentation of patient care with offsetting efforts aimed at coordination and teamwork
• Increasing substitution of capital for labor
• Less of a personal relationship between the server and the served.
Managed care has become a major form of organization for care delivery. Practices and institutions have merged or sold out to a wide array of health care organizations. Physician incomes, especially those of specialists, have dropped rapidly. These are all symptoms of the industrialization of what had been a cottage industry organized along craft lines despite being 14% to 15% of our country’s economic activity.
FIGURE 2-3 Suggested Impact of Case Complexity and Knowledge Characteristics on Process Choices in Health Care

Figure 2-3 suggests one way of thinking about industrialization and the various process requirements that analogy suggests. Two dimensions are identified: Type of Case: Simple to Complex and Knowledge Base: Science-based (Codified) to Art (Tacit). The drivers of industrialization in health care have been the expansion of the science base of medicine and the codification of product definitions and process specifications. For more about art (tacit knowledge) versus science and product and process improvement trajectories in general, see Victor and Boynton (1998). Their applicability to health care is discussed in greater detail in McLaughlin and Kaluzny (2006).
The craft/guild system attributed to medicine before World War II implied that medicine was primarily an art lacking decisions rules that could be communicated effectively (tacit knowledge) (Ferdows, 2006). With more and more scientific and/or codified knowledge, it was possible to differentiate between simple and complex cases. Where activities were simple, they could be turned into mass production systems that repeated the same process over and over. If the knowledge was still pretty much an art but the case simple, the work could be delegated to less experienced or less trained personnel (like in the old apprentice system in which much of the simpler work was delegated to others, but the master craftsman maintained control and handled the trickiest parts). Part of the training process was learning what not to treat and what to hand off to appropriate experts. Where processes are codified but the cases are complex, and hence varied, they need to be processed in a coordinated flow between provider subsystems, a process referred to today as mass customization. The modern hospital can be visualized as such a process, with patients (all or in part) moving from the bed tower to the X-ray department to the blood laboratory to surgery to the intensive care unit to the step-down unit and back to the bed tower. However, we all witness the consequences of matches and mismatches between situations high in art that fit with craft (apprenticeship and job costing or fee-for-service) and those high in science that fit with industrialization (bundled payments, use of clinical pathways, length-of-stay controls).
Mass production does exist in areas such as cataract surgery and other “centers of excellence,” but there is a widespread desire to avoid mass production of medical services. That desire is legitimate given the high inherent variability in patient anatomy, physiology, and psychological needs and preferences. Mass customization is the logical end point for this process. Health care is a mixture of art and science; however, health care differs from classic mass production in the sense that patients present themselves with both simple and complex problems (multisystem problems or comorbidities). Problems that have a clearly optimal treatment regimen and those for which medical knowledge is limited can appear simultaneously in the same individual.
What has kept this from being a well-coordinated process has been the absence of development of process codification and inadequate investment in information technology, as well as a lack of provider commitments to share knowledge and to abide by specified process parameters. This is often attributed to lack of sufficiently aligned professional and institutional incentives.
Ownership of Intellectual Capital
As work is industrialized, work methods are specified by the organization rather than the individual artisan. In health care, we have historically assumed that intellectual capital resides with the professional. This stems from an assumed inability of the public (including lay administrators) to understand the technical processes of health care. This notion is the underlying foundation of medicine’s claims of professional autonomy, but that autonomy is threatened by recommendations such as those of Einthoven and Tollen (2005), who argue for reliance on integrated delivery systems for cost control. They argue against provider-level competition and for system-level competition because integrated delivery systems:
• Can better motivate and hold accountable clinicians to use best practices
•Do a better job of achieving coordination and continuity of care, especially for the chronically ill
•Are more likely to invest in and implement interoperable information technology
•Are more likely to adopt and successfully implement “large scale efficiency measures”
•Are more likely to compete directly with each other on quality and price
•Are more likely to be selective among providers than loose and inclusive provider networks serving most insurers in a community.
These authors want employers to offer employees a choice of carriers to motivate insurers to avoid providers of low quality and high costs. Haislmaier (2006) argued that a key innovation of the Massachusetts reforms was the “Connector” exchange system, which allows individuals insurance portability and enables them to change carriers without reunderwriting.
As competition increasingly depends on the implementation of evidence-based practices by an institution and rapid dissemination and adoption by practitioners, organizational rather than professional learning becomes the focus. That raises new questions about the provider–management conflicts (often called suits versus coats), the role of continuing graduate medical education, and access to clinical records and research outputs. Professionals must be prepared to take leadership in issues around developing, disseminating, and compensating for intellectual capital or lose even more autonomy.
The Professions
One interesting aspect of the U.S. medical system is that it did not industrialize under either corporate or government control. Many U.S. services industry sectors have concentrated into large corporations emulating the oligopolistic model of dominant multinational firms. Starr (1982) discussed how the medical profession gained control of health care and maintained it in the presence of pressures to consolidate into corporate forms of organization. The cover of his book, The Social Transformation of American Medicine, states that it is about “the rise of a sovereign profession and the making of a vast industry.” Writing in the early 1980s at the height of the interest in HMOs, he foresaw rapid growth in the corporate form of care delivery.
Much of the ebb and flow of employer, insurer, and government attempts to solve health care system issues flows around issues of industrialization and corporate delivery of medical care. Starr (1982, pp. 229–231) cited five structural changes in American medicine before World War II that strengthened the sovereign position of physicians in health care and enabled them to avoid working in a corporate structure. They were as follows:
1.An informal control system based on dependence on colleagues for referrals and hospital privileges
2.Formal control of labor markets through the licensing process
3.Transfer of many of the overheads and investments that a typical private corporation would make should it provide medical services to societal organizations such as hospitals, public health departments, and educational institutions
4.A lack of countervailing organizations that could choose to challenge the political and economic influences of the medical profession
5.Few attempts to develop integrated care organizations that would attempt to rationalize the highly fragmented, but insulated delivery system.
In 1934 the American Medical Society claimed that “all features of medical service in any method of medical practice should be under the control of the medical profession.” Elsewhere in the world the response to that assertion is that control should rest with the government. In the United States, we increasingly hear that it should rest on “consumer sovereignty.”
Is there something inherently different about health care? Nobel economics laureate Kenneth Arrow addressed this question in his influential 1963 article entitled “Uncertainty and the Welfare Economics of Medical Care.” He argued that some functions, such as insurance, exhibit typical market behavior, but he also observed that the buyer is not a rational optimizer in a perfect market, but is a vulnerable, trusting patient who seeks information in an uncertain world from a physician who is also dealing with many uncertainties. He emphasized elements of uncertainty and market failure such as the following:
•Inequality of information (today called information asymmetry)
•Inequality of resources, especially income
•Professional ethic demanding that treatment be independent of ability to pay
•Importance of trust to the effectiveness of the care
•Vulnerability and psychological state of patients
•Longer term implications of the ongoing physician–patient relationship.
Arrow pointed to a number of the unique structural elements of the health care marketplace such as professional licensure, nonprofit institutions, sliding fee scales, and government intervention as responses to these elements. He argued that much of the uncertainty could be handled through insurance and government intervention. His postscript concluded,
The failure of the market to ensure against uncertainty has oriented many social institutions in which the usual assumptions of the market are contradicted. The medical profession is only one example, though in many respects an extreme one…. The economic importance of personal and especially family relationships…is based on non-market relations that create guarantees of behavior which would otherwise be afflicted with excess uncertainty…. The logic and limitations of ideal competitive behavior under uncertainty force us to recognize the incomplete description of reality supplied by the impersonal price system. (Arrow, 1963, p. 967)
Criticisms of Arrow and of how that article is interpreted are many, but it remains very relevant and very influential. Sloan (2003, p. 58) argued that the article is used by those who oppose markets and argued that “an alternative approach—in my view, a much more fruitful one is to recognize the market imperfections and devise various interventions to empower consumers…. Consumer ignorance should not be taken as a given.” Rice (1998) raised 15 questions about the assumptions of the competitive market model applied to health care, such as lack of externalities, fixed preferences, absence of monopoly, complete and accurate information availability, and rational decision making. Henderson (2002, pp. 109, 111) accepted the market failure examples but counters normatively,
On the other hand, no credible evidence supports government remedies as the answer to the perceived inequities either. Markets may fail, but governments may be just as prone to failure. And correcting government failure is inherently more difficult than correcting market failure…. Criticism directed at market failure without at least admitting the possibility of government failure is dishonest, or at minimum naïve.
Starr interpreted many of the social institutions that Arrow cited not as social responses to uncertainty but as steps that organized medicine used to establish its monopoly control over health care and stave off industrialization and cites examples of them increasing uncertainty.
Why has it remained a cottage industry? The medical profession has been very protective of its control over health care. Yet there have been a number of moves in the direction of consolidation and corporate structures. Starr (1982, p. 420) suggested five dimensions likely to change should the practice of medicine move toward a more typical American corporate structure. They are:
1.Change in ownership and control
2. Horizontal integration into multi-site organizations
3. Diversification and public restructuring with holding companies and subsidiaries with differing product lines
4. Vertical integration involving multiple stages and levels of care
5. Industry concentration of ownership and control of services.
Interestingly, all of these have been taking place, albeit slowly and selectively. In fact, many of the implemented proposals and experiments have accomplished aspects of each of these and created efficiency, effectiveness, and wealth. They have each had their day, yet they have not stemmed the inflationary trends nor overwhelmed the smaller operators. Hospitals and corporations that bought up physician practices in the 1990s experienced problems in recouping their investments. For-profit hospital chains have had their ups and downs. Integrated health systems do dominate in many specific areas, but have not been terribly successful in replicating their approach elsewhere.
Status of Professions and Professionals
It may seem odd to think of professional status as a variable to manipulate in establishing health policy; however, professional roles are not immutable. New professions emerge as technology changes and others lose ground. Professions are a combination of knowledge, political power, and custom. It is the public that either accepts or denies one group’s dominance over a knowledge domain and the delivery of services.
Health workers existed long before the modern medicine era. Most societies have had shamans, birth attendants, and indigenous healers. Before 1850, physicians did not seem to enjoy any consistent status in the United States. With the advent of modern science and modern medicine, governments became alarmed at the amount of quackery going on. They cooperated with the medical profession and conferred on the profession a near monopoly, which has been buttressed by our system of licensing and credentialing.
Starr (1982) traced in detail the parallel political and social development of monopoly power by American physicians. Freidson (2001) saw the professional model as a third alternative to the hierarchical (corporate) model and to “free market autonomy.” In the professional model the professionals maintain considerable control over (1) the information and (2) the means of delivery in their domain; however, as we see in Chapter 5, many proposed and implemented alternatives have the effect of weakening the existing status of health professionals. This is a natural result of the emphasis on market mechanisms and an informed consumer, as well as the vastly increased access to information that the public now has, especially through the Internet.
Given that professional status and credentials offer privileges with economic value, health policy analysts must consider how that value and power might be allocated to serve the public interest. The literature suggests a number of issues of interest related to professional status decisions:
• Labor substitution
• Outsourcing
• Rising educational barriers
• Disintermediation
• Consumer-centered care based on quality report cards, etc.
• Incentive systems for quality, cost, and access.
As potential policy alternatives, all of these warrant further consideration.
Labor Substitution
Despite the monopolies offered by licensure and credentialing, many health care tasks can be done by more than one level of health care worker. For example, there were midwives before there were obstetricians. That function nearly disappeared in the United States but is undergoing a resurgence. Nurse practitioners and physician assistants now are the first level of care for many patient encounters. In many psychiatric practices, the psychiatrist handles the patient’s medications but delegates most other care activities to psychologists, social workers, and other counselors. Pharmacies now use pharmacy technicians as well as pharmacists. Dental practices have their own dental hygienists and technicians working in parallel with the dentists. Primary care physicians perform procedures once limited to specialists. The key to further substitution is whether the alternative type of worker is qualified for the problem at hand and whether their unit cost is less. The main drivers for labor substitution are availability and cost. Most substitutions were initially proposed to overcome a shortage of personnel in one area, but after the experiment has worked, more and more organizations adopt it to increase access and reduce cost.
Outsourcing
This is a relatively new phenomenon in health care, but is driven by the same factors as labor substitution. A shortage of radiologists in rural areas has led to networking arrangements in which radiologists in urban areas read the images from rural hospitals in their offices or homes without going to the patient. Technicians produce the images and radiologists read them off site. After the information is digitized, it can be read anywhere in the world and it is not unusual to find that U.S. imaging and electrocardiograms are farmed out to Asian locations where salaries are much lower. More and more patients who lack adequate insurance coverage but have reasonable incomes are choosing to have elective surgery done in reputable overseas hospitals where the cost is much lower. Pharmaceutical companies are also moving medical research and clinical trails offshore to reduce costs.
Rising Educational Barriers
The force that runs counter to labor substitution is the pressure within each profession to raise the bar that one must clear in order to achieve professional status. The biggest suppliers of nursing labor in the United States are the community colleges, which have programs that do not always end up with a baccalaureate degree; however, nursing leadership has argued for the need to have more, if not all, nurses with 4-year degrees. At the same time, nursing subspecialists proliferate, requiring master’s level degrees. The pharmacy schools that once offered pharmacy bachelor degrees now produce Pharm. D. recipients. All of these moves require more training and in turn constrain the supply of personnel in a field and seemingly justify higher wages and greater professional status. One casualty of this trend in the university is the use of cross-disciplinary faculty to teach in the health professions. Rather than training in common or using common faculty from other departments to teach their anatomy, pharmacology, and behavioral science, for example, they increasingly insist on having it done by individuals with doctorates in their own field. In-sourcing all of the teaching increases the demand for their own doctoral-level graduates.
Disintermediation
The term disintermediation means removing the person in the middle, the intermediary. One prime example is the recent emphasis on direct-to-consumer pharmaceutical advertising. Ten years ago, companies selling efforts focused entirely on the prescribing physician. That has changed markedly. Ad after ad suggests a treatment, syndrome, disease, or risk factor that the patients might not even be aware of (i.e., hypercholesterolemia, acid reflux disease, toenail fungus) and urges them to ask their physician about the branded treatment. This advertising bypasses the physician initially and, given the availability of imported drugs, may bypass the physician entirely. Table 2-6 shows situations in which primary care physician control of medical information and/or of the means of delivery of care are being bypassed today.
TABLE 2-6Disintermediation Activities Affecting the Primary Care Physician
Actor
Activities Affecting Information Control
Activities Affecting Transaction Control
Pharmaceutical Companies
Direct-to-Consumer advertising (DTCA)
Web sites
Moving patent-expired drugs over the counter (OTC)
Screening Centers
DTCA
Direct patient reporting
No referral required
Direct patient pay
Nurse Practitioners Physician Assistants
Independent practice
Independent practice
Psychologists
Independent practice
Gaining prescribing authority
Insurers
Deep portals for enrollees
Case management
Forcing drugs OTC
Case management
Case Management Firms
Taking over patient management
Self-care advice
Patient advocacy in community
Pharmacy Benefits Management Firms
Formulary feedback to patients
Multi-tiered copays
Employers
Educational programs and web portals
Screening programs
Academic Medical Centers
Newsletters/Web sites
Telemedicine programs
Telemedicine programs
Government Agencies
Web sites/Advertising
Screening recommendations Case management
Preferred drug lists
Screening programs
Patient/disease Advocacy Groups
Web sites/Advertising
Screening recommendations
Screening programs
Pharmacists
Counseling centers
Screening programs
Hospitals
Protocols share with patients and their families
Formularies
Formularies
Screening programs
Source: Table 1, p. 72 from C.P. McLaughlin et al., Changing Roles for Primary-Care Physicians: Addressing Challenges and Opportunities.” Healthcare Quarterly, Vol. 8, No. 2, 2005 Copyright Longwoods Publishing Corp.
The primary care provider is not the only intermediary that can be targeted. The decentralized and disjointed nature of the health care industry has allowed the rise of an array of middlemen who have profited greatly by aggregating the demand of small actors and obtaining discounts or who have achieved at least a temporary knowledge advantage that has enabled them take advantage of the market (sometimes called arbitraging). The Wall Street Journal ran a series of articles on these highly profitable intermediaries in 2006, focusing on pharmacy benefits managers, billing consultants, catastrophic case care managers, Medicaid HMOs, nursing home pharmacy firms, and insurers (Wessel et al., 2006). Large self-insured employers have been attempting to get them to make their operations more transparent or eliminate them entirely.
Consumer-Centered Care Based on Quality Report Cards, Etc.
Quality reporting is relatively new in health care. Diagnosis-related groups, introduced in the 1980s, classified hospital services in 467 bundles of care. A parallel relative value scale system was also developed to evaluate professional fees. It had not been possible to adjust cost data for severity and patient characteristics nor to maintain quality control records until those product definitions were established and widely adopted. After data on costs could be associated with specific diagnoses and compared across cases, providers, regions, and institutions, the tools began to fall in place for a corporate-level analysis, allowing a more industrial approach to health care management.
Incentive Systems for Quality, Cost, and Access
Once cases could be assessed for process quality, outcomes, and costs, payment could be based on overall experience rather than on the inputs utilized in the specific case (fee for service). We discuss pay for performance more extensively in Chapter 3.
MEDICALIZATION OF SOCIETY
A 2006 study showed that white, middle-aged British patients reported better health status than Americans, despite spending much less per capita on health care. Some attribute the differences to high U.S. stress levels; however, an alternative point of view is that the high rate of expenditure on medical care, especially the amount of screening taking place and the constant barrage of health-care-related advertising, has resulted in a reduced perception of wellness. In essence, the greater the proportion of our economy that goes into health care–related activities, the more “sickness” we experience (Welch et al., 2007). This goes back to the definition that we have heard attributed to any number of sources—that a healthy person is one who has not been sufficiently examined by a physician. Consider, for example, comparisons of high blood pressure and high cholesterol levels in U.S. and British 40 to 70 year olds. Americans self-reported more of these problems; however, measured blood pressures were the same, and Americans had lower cholesterol levels. Some attribute lower levels of reported illness among Britons to the fact that British primary care physicians do much less routine screening (Hadler, 2004; Kolata, 2006a). Some see the U.S. screening penchant as a transfer of scarce medical resources from the sick poor to the worried, insured well and as a logical outcome of the medicalization of life together with the industrialization of medicine (Heath, 2005).
Other issues related to the medicalization of U.S. society include the dependence of the economy on the growth of this sector. A 2006 cover story in Business Week asserted that two sectors, construction and health care, accounted for all the growth in private sector employment over the preceding five years and that growth in health care employment was the greater of the two. “Since 2001, the health care industry has added 1.7 million jobs. The rest of the private sector? None.” (Mandel, 2006, p. 55). Career choices and educational offerings have changed in response to the perceived demand.
Health issues have received increased emphasis in news reporting, television programming, television advertising, and recreation facilities. We have had visitors from other countries ask, unprompted, why we have so much medical and pharmaceutical advertising. There are pluses and minuses to this increasing presence of health care issues throughout our society. We are not arguing that it is good or bad; however, the analyst must take this trend into account when making recommendations. Overall, medicalization tends to increase both the political and economic risks of rapid or radical change to our health care system.
CONCLUSION
This chapter examines the status of the American health care system in terms of access, technical management, management of interpersonal relationships, and costs. It offers comparisons of per capita expenditures, GDP, life expectancy, perinatal mortality in many countries. It also outlines the linkages between these variables or lack thereof. With such data available, the educated citizen can join the debate about where the United States wants to go.
Other concerns in such a debate could include the impacts of changes and trends in the professional environments of health care. Two related constructs discussed in this chapter are the industrialization of health care and the medicalization of American society.

CHAPTER 3How Did We Get Here?
A history of health care financing and policy making in the United States could well start in 1791 with passage of the Bill of Rights. The Tenth Amendment to the U.S. Constitution declares that those powers not expressly given to the federal government belong to state and local governments. Health and education were not expressly given to the federal government; however, some federal involvement has been justified under the welfare clause of the Constitution and also through Jefferson’s argument of implied powers.
With minor exceptions, the federal government has limited itself to financing national programs of health and education, rather than delivering services directly. Yet the federal financial share is fast approaching half the direct cost of health care, even without counting the tax deductions allowed to individuals for health care spending and to corporations for employee health insurance premiums. If you count tax subsidies, health insurance provided to government employees and public dollars spent at all levels of government, government funds account for close to 60% of all health spending.
This chapter looks at the co-evolution of two inextricably linked U.S. systems—one for delivering medical care and one for financing it. The primary focus is on medical care financing, namely the health insurance system, and ways it has impacted delivery systems, for instance, by creating incentives for overutilization or underutilization. Other insurance systems exist to cover expenses for particular types of health care, specifically dental, vision, and long-term care. Public health is financed primarily through state, local, and federal tax dollars (taxes and fees), although the mix has varied greatly. In 1968, roughly half the spending came from the federal government. Today, even after increased federal investment in public health emergency preparedness after 9/11, state and local governments pick up much of the governmental costs (Frist, 2002). The evolution of our system for financing mental health services is discussed in several later sections of this book, including the case at the end of Chapter 12. The case study that follows this chapter looks at where else we might have gone by describing the financing and delivery of health care in five other industrialized countries.
CONTENDING VISIONS OF A SYSTEM FOR DELIVERING HEALTH CARE
Contending visions of how the health system should operate have dominated U.S. health care policy making at different times. Yet there has not been a dominant viewpoint since the 1960s, and all of the contending approaches remain on the table. We focus on three characterizations that contrast the contending points of view while recognizing what we are really talking about is a continuum of alternatives as represented in Figure 3-1. There are five potential characterizations of the health care market in Figure 3-1, but one, a provider monopoly, has been ruled out by our legal system, although it said to have characterized the U.S. health system between World Wars I and II (Starr, 1982). A monopoly is control by a single provider and is usually illegal, whereas a monopsony is control by a single buyer. In Figure 3-1, the extreme monopsony position is represented by the U.K.’s original National Health Service. It is not currently a realistic contender for adoption in the United States.
Administered competition means that there are multiple suppliers, but the market is controlled by a primary buyer, usually a government creation. It could involve universal coverage, a single payer, and/or a single underwriter.
Oligopolistic competition involves a relatively open market dominated by a few large sellers and is characteristic of many U.S. industrial sectors. Usually there are three or four sources of goods or services that control at least 40% of the market. In health care, which appears to be so decentralized, these three or four vendors may control state or local markets rather than the national market, although national oligopolies exist in many areas such as pharmacy benefits management, Medicare-managed care, replacement joints, imaging equipment, and pharmaceuticals distribution. In California, three insurers control 62% of the commercial market for enrollees under age 65 years, and four control 74% (Fuhrmans, 2007a). Two or three hospital groups often control most of the relevant local market. Concentration in hospital markets has been increasing sharply enough to become a concern of the Federal Trade Commission, although available studies of hospital concentration yield ambiguous findings (Gaynor, 2006). In many state markets, the same is true of health insurance providers.
FIGURE 3-1 Stages of Health Care Market Power

Perfect (free market) competition assumes the following conditions:
• There are large numbers of buyers and sellers so that no one controls prices
• All buyers and sellers have complete and accurate information about the quality, availability, and prices of goods
• All products have available perfect substitutes
• All buyers and sellers are free to enter or leave the market at will.
A CHRONOLOGY
Centuries ago, medical care was a religious calling, not a scientific field. The term hospice was much more representative of the process in health care institutions than hospital. Gradually, health care has become a calling and an industry. Well into the 20th century, U.S. physicians took whatever people could pay. Teaching institutions provided free care in return for allowing learners to work on those who could not pay. This system of combined fee-for-service and charity care existed before the Great Depression and World War II. From there, one can trace the development and gradual introduction of employment-based health insurance and prepaid group practices leading then to health maintenance organizations (HMOs) and industrialization of parts of the delivery system with pharmaceutical giants, hospital chains, pharmacy chains, and large integrated health care systems.
The Health “Insurance” Approach: Moving From Provider Monopoly Toward Provider/Insurer Oligopoly
Health care insurance systems in the United States were started in the Great Depression to stabilize the cash flows of providers. The concept existed in Europe much earlier. For a discussion of the origin of health insurance there, see Starr (1982). These early efforts ultimately became the not-for-profit Blue Cross/Blue Shield organizations.
Some people credit Dr. Justin Ford Kimball, the administrator of Baylor Hospital in Dallas, with starting the U.S. medical insurance movement in 1929. He conceived of the idea of collecting “insurance premiums” in advance and guaranteeing the hospital’s service to members of groups subscribing to this arrangement. Furthermore, he found a way to involve employers in the administration of the plan, thus reducing expenses associated with marketing and enrollment. The first such employer was the Dallas school district, which enrolled schoolteachers and collected the biweekly premium of 50 cents (Richmond & Fein, 2005, p. 31).
About the same time, prepaid group practices began in Oklahoma, but they were bitterly opposed by local medical societies. Prepaid group practices, forerunners of today’s HMOs, were also started to provide stable cash flows, but remained a relatively minor factor for a number of decades because of medical society opposition.
State hospital associations controlled the Blue Cross organizations, and medical societies controlled the Blue Shield organizations. Well into the 1940s, state laws in 26 states said that only medical societies could offer prepayment plans for physician services. In 1934, the American Medical Association (AMA) set forth conditions that it argued should govern private insurance for physician services (Starr, 1982, pp. 299–300):
• “All features of medical service in any method of medical practice should be under the control of the medical profession.”
• This included all medical care institutions, and thus, only the medical profession could determine their “adequacy and character.”
• Patients were to have absolute freedom of choice of physician.
• “A permanent, confidential relation between the patient and a ‘family physician’ must be the fundamental, dominating feature of any system.”
• No form of insurance was acceptable that did not have the patient paying the physician and the patient being the one reimbursed.
• Any plan in a locality must be open to all providers in a community.
• Medical assistance aspects of a plan must be limited to those below the “comfort level” of income.
Group Health Association of Washington DC, a prepaid group practice, began in 1937, but faced strong opposition. In 1943, the Supreme Court (AMA v. U.S., 1943) upheld a lower court in a case brought by the Federal Trade Commission, finding that the AMA and the DC Medical Society were guilty of “a conspiracy in restraint of trade under the Sherman Anti-Trust Act” and had hindered and obstructed Group Health “in procuring and retaining on its staff qualified doctors” and “from privilege of consulting with others and using the facilities of hospitals” (Richmond & Fein, 2005, p. 34).
Expanding Participation
World War II saw industrialization of all available hands, breaking the Great Depression, inducing migration from rural areas to industrial cities, increasing the power of industrial unions, and inaugurating the era of big science. It also led to an era of optimism that together Americans could accomplish collectively anything that they wanted (Strauss & Howe, 1991).
Many employers had established their own industrial health services to support their employees and the war effort. Some of these services, such as Kaiser Industries’ medical department, evolved into prepaid group practices. The Kaiser Permanente Group opened up to outside enrollees at the end of the war. Others, like the Health Insurance Plan in New York, which started in 1947, sprang up independently.
The government imposed wage and price controls during World War II. As labor became scarce and the war turned in the Allies’ favor, workers pressed for better compensation. The Office of Price Administration held the line on wage increases, but allowed improved benefits through collective bargaining. This led to the rapid expansion of health insurance among unionized industrial and government workers. This was also consistent with the provision of medical benefits to the vast military establishment. Unemployment fell from 17.2% in 1939 to 1.3% in 1944, and the real gross national product grew by 75% (Richmond & Fein, 2005). Health insurance costs were not yet a serious concern of corporate managers nor of government. In 1948, the National Labor Relations Board ruled that refusal to bargain over health care benefits was an unfair labor practice.
Collective bargaining was the basic vehicle for determining health benefits. Because union officers were elected by their membership, union leaders did not choose catastrophic coverage but sought to maximize the visibility of benefits to their rank-and-file (voting) members. This led them to bargain for first-dollar, fee-for-service coverage for everyone and to put limitations on lifetime benefits for those who were born with or developed catastrophic or high-cost chronic conditions. It also led them to emphasize employment-related coverage for dependents. They wanted most union members to experience regular payouts from that benefit. If their workers were young and healthy, they would still see payment for services such as obstetrical and pediatric care that their families consumed. Employers did not much care how their workers divided the contract settlements between wages, health benefits, and other fringes. If workers and their families already had individual health coverage, they still gained a tax advantage after the employer paid the premium directly. Blue Cross enrollments tripled between 1942 and 1946, while enrollment in commercial health insurance plans more than doubled (Becker, 1955).
Postwar Responses: Adding Administered Competition
Following the major expansion of health insurance during World War II, most U.S. presidents suggested health care reforms of some sort. The Hill-Burton Act of 1946 expanded hospital facilities. President Truman recommended developing a system of universal health insurance based on the report of the President’s Commission on Health Needs of the Nation; however, it was opposed by entrenched interests and lapsed when President Eisenhower was elected. In 1950, Congress approved a grant program to the states to pay providers for medical care for those receiving public assistance. Proposals for a Medicare-type system under Social Security appeared in Congress as early as 1957, but it took 8 years of debate for Congress and the White House to reach a consensus.
In 1960, the Kerr-Mills Act created a program administered by the Welfare Administration and the states for “Medical Assistance to the Aged,” which also covered the “medically needy” older population who did not necessarily qualify for public assistance. Richmond and Fein (2005) described Kerr-Mills as an attempt to stave off Medicare-type programs.
The Joint Commission on Mental Illness and Health, formed under Eisenhower, did not issue its final report until 1961, under the Kennedy administration, which oversaw the passage of the Mental Retardation Facilities Construction Act of 1963 and the Community Mental Health Centers Act of 1963.
Early in his term, President Johnson announced formation of a Commission on Heart Disease, Cancer, and Stroke. Its recommendations led to the Regional Medical Programs legislation to advance training and research. Congress, however, added a provision that this work was not to interfere in any way with “patterns and methods of financing medical care, professional practice, or the administration of any existing institutions” (Richmond & Fein, 2005, p. 44).
While the Medicare debate continued, Congress passed many health measures as part of Johnson’s War on Poverty. Given the highly visible opposition of organized medicine, however, health components of these new programs were not housed in the U.S. Public Health Service. For example, the Office of Economic Opportunity started neighborhood health centers, and its Head Start program included health assessment and health care components for children.
When the Johnson administration finally secured passage of the Social Security Amendments of 1965, it accommodated AMA concerns by offering three separate programs: (1) Medicare Part A, providing hospital coverage for most of the older persons; (2) Medicare Part B, a voluntary supplementary medical insurance program; and (3) Medicaid, which expanded the Kerr-Mills program to help with out-of-pocket expenses such as nursing home care and drugs and extended potential eligibility to families with children, the blind, and the disabled under the Welfare Administration.
There were other compromises in the legislation. For example, at the time, hospital-based physicians were being placed on salary so that hospitals could use some of their medical fee revenue to cover the capital costs of their practices. The Medicare bill specifically required that anesthesiologists, radiologists, and pathologists be paid directly, not through a hospital. That law also stated, “Nothing in this title shall be construed to authorize any federal officer or employee to exercise any supervision or control over the practice of medicine.” Some have questioned whether the government’s 1.5% pay-for-performance bonus program violates this provision (Pear, 2006b).
Bodenheimer and Grumbach (2005) labeled the years from 1945 to 1970 as those of the “provider-insurer pact” (p. 167). Starr (1982) referred to the period before 1970 as one of accommodation between the insurance industry and the medical profession. He noted that it was a period in which most employed Americans were covered because union shops were dominant. “The government supported this private tax system by making employers’ contributions into it tax exempt from the government’s own taxes. Private voluntary insurance was neither strictly voluntary, nor strictly private, but its compulsory and public features were hardly noticeable” (p. 334). That system, however, left out the poor, the unemployed, agricultural and domestic workers, most farmers, the disabled, and older persons. It was the needs of some of these uninsured populations that the 1965 Great Society legislation addressed.
The Great Society
When implemented in 1965, Medicare mirrored the structure of health insurance in the industrial sector, but without lifetime limitations. It did not provide adequate coverage for drugs or for long-term care (nursing homes, hospice care, home health) or much for prevention. Many employment-based health plans paid for prescription drugs, but not for long-term care. Medicare did not cover prescription drugs until 2006.
It may be hard to believe today, but before 1965, academic medical centers delivered a large amount of the urban charity care. Local volunteer physicians supervised the clinics, and patients received care at no charge or at nominal fees in return for letting learners practice on them. Because many people covered by Medicare and Medicaid had been receiving charity care, the net effect of Medicaid and Medicare was to pay in full for services once provided free or with income-based discounts. It also gave the urban poor a choice of institutions, a choice they quickly exercised.
Rapid Expansion of Capacity
The full fee-for-service payments for visits previously provided free, or nearly so, increased physicians’ incomes without increasing supply. At the same time, availability of insurance to underserved populations increased the demand for services. Academic medical centers added new full-time salaried medical staff that billed for their services to all insurers and cross-subsidized education and research. Heavy investments in medical research increased the variety, cost, and effectiveness of what providers could offer. Hospitals also had to cover the capital and support costs of hospital-based physicians now that they could not bill for them directly. A limited supply of resources, new demand, and rapid increases in volume because of technological advances led to rapid price inflation.
The primary policy response to this increase in demand for health services in the 1970s and 1980s was to increase the supply of resources. As personnel shortages appeared, governments increased the supply of providers and facilities. For example, it launched the Community Health Center and Migrant Health Center programs. Then, in 1970, it established the National Health Service Corps to increase provider supply in underserved areas via scholarships and loan forgiveness. Many new programs were established to train health professionals, and existing ones expanded with financial assistance from state and federal governments
The Private Sector Responds
At the end of World War II, the health care sector accounted for 4.5% of the gross domestic product (GDP). By the mid 1980s, it was up to 11%. With the cash flows from private insurance and Medicare and Medicaid, community hospitals expanded rapidly but no longer relied on philanthropy for capital. Wall Street was happy to finance their expansion by selling bonds. Interest was considered a reimbursable cost by rate setters. Health care attracted entrepreneurs and for-profit hospital chains grew rapidly. Similarly, the nursing home industry and kidney dialysis centers attracted new capital. The medical establishment, which had fought against corporate control of hospitals and other institutions, was relatively helpless. The AMA’s stance on Medicare and Medicaid had cost it credibility, and its constituency was now spread out between the AMA, specialty and subspecialty societies, and the academic medical centers, each of which had their own interests.
Costs and Concerns Mount
As health care costs mounted and became a much more significant share of the economy, more and more observers expressed concern about the lack of competition in portions of the industry and began suggesting ways to control costs. One suggestion was the prepaid group practice or HMO, which shared some of the cost risk with the employer, thereby inducing reduced costs. The success of Kaiser Permanente and others in delivering care at a lower premium cost without evident diminution of quality drew much attention. This led the Nixon administration to support the Health Maintenance Organization and Resources Development Act of 1973. Although that legislation had little immediate impact, later amendments opened the way for the explosion of HMOs and other vertically integrated health care systems in the 1980s. In 1974, the administration also proposed the Comprehensive Health Insurance Program, which sought to provide health insurance to all employees. Congress debated this and a similar measure, the Kennedy-Mills bill, but did not enact either. Richmond and Fein (2003) argued that 1974 was the closest the nation ever came to universal health insurance and that those proposals, although eclipsed by the Watergate coverup and Nixon’s resignation, were the basis for successive calls for congressional action by Presidents Ford, Carter, and Clinton.
Charges and Cost Shifting
Originally, Blue Cross organizations, owned by state hospital associations, were interested in a management cost-finding system that fairly allocated the full costs of services among the users of those services. Because they understood that most costs in a hospital system are (1) fixed and (2) joint,1 they did not attempt to find out the marginal cost of a service (marginal cost is the additional cost of producing one additional unit of a product). They established an estimated average direct cost for each unit of service (bed day, laboratory test, operating room hour, X-ray) and then allocated the overhead costs on the basis of the number of units consumed by the payer’s enrollees. The largest expense in the institution, nursing time, was treated as an overhead and not allocated to the individual patient. The resulting charges included all the overhead costs, allowing each institution to break even on its Blue Cross patients. If the patients in your health plan used a quarter of the X-rays produced by the radiology department, the plan paid a quarter of the full costs of that department (including allocated overheads). If institutions offered discounts, they tended to favor the Blues, not the other insurers, and certainly not the directly paying patients. This resulted in what is called cost shifiting.
More patient care costs were not covered by insurance contracts, and thus, hospitals added the cost of this uncompensated care to the overhead rate and increased charges accordingly. It was easy to manipulate charges to mark up costs and either make a profit or provide deeper discounts to preferred customers. First the Blues and then the federal government exerted pressures on their providers, obtaining substantial discounts in return for their business. This shifted the costs of uncompensated care to private insurers and the uninsured. Reinhardt (2006, p. 64) observed, “What prevailing distributive ethic in U.S. society, for example, would dictate that uninsured patients be billed the highest prices for hospital care and then be hounded, often mercilessly, by bill collectors?”
THE CURRENT “ERA” EMERGES
Fox (2001) described three eras of managed care:
• Pre-1970, early years
• 1970 to 1985, the adolescent years
• 1985 to the present, managed care comes of age.
Richmond and Fein (2003) described the period 1965 to 1985 as a time of emerging tensions between regulation and market forces and the period after 1985 as the “Entrepreneurial Revolution.” Bodenheimer and Grumbach described the 1970s as a period of developing tension, the 1980s as the “Revolt of the Purchasers,” and the 1990s as the breakup of the provider–insurer pact. The changeover to managed care slowed the growth of premiums from the mid 1990s into the first 2 years of the new century, but then they took off again. In the meantime, both providers and patients expressed displeasure with HMO constraints on treatment choice and provider choice. New state laws sprang up limiting control of professionals and patients by insurers and HMOs. Some thought managed-care control mechanisms had already picked the low hanging fruit, stopping the most egregious cases of inappropriate utilization. One of these mechanisms, capitation (a fixed payment per enrollee per time period), although widely promoted because it shifted the cost risk to providers, became less fashionable as providers were unable to manage it or lacked sufficiently large risk pools and capital reserves to handle it. Insurers moved toward preferred provider plans where patients and providers had more freedom of choice; however, providers gave deeper discounts, and enrollees were subject to higher premiums and greater deductibles and co-payments (HDHP/SO). Figure 3-2 illustrates the magnitude of these shifts in the insurance contracts in force.
Breaking the Old Social Contract
FIGURE 3-2 Health Plan Enrollment for Covered Workers by Plan Type, 1988–2006

Source: “Employer Health Benefits 2006 Annual Survey—Chartpack,” (7451), The Henry J. Kaiser Family Foundation and Health Research & Educational Trust, September 2006
Employers fought back as their premiums jumped at rates well above the overall inflation rate and as competition from foreign firms that did not provide such benefits ate into their markets. They demanded that insurance companies begin to control premiums (Starr, 1982; Mayer & Mayer, 1985). Bills based on the published price lists of doctors and hospitals typically appeared on the accounts sent to patients and others. People with no insurance were asked to pay full charges. Commercial insurance companies had contracts that discounted the charges. The Blues and large HMOs enjoyed even bigger discounts, and the federal government got the biggest discount because it demanded the lowest rate allowed to any customer. Because of the inflated charge figures posted to most bills, the public thought their unit care costs were a great deal higher than they really were and that their insurers were picking up a higher proportion of their costs. Real transfer prices for medical services were kept under wraps. This also had the effect of making deductibles and co-payments appear to be a much smaller proportion of actual costs than they really were. Under pressure from the public for greater transparency, that has gradually changed. The public now sees more of what is actually paid and by whom, but real transparency is still lacking. Table 3-1 shows recently released information on Medicare charges billed by hospitals and payments made by Medicare and the patients by procedure type. This is part of the federal government’s efforts at price transparency.
When you read the financial reports of health care institutions, you get a picture of the size of these discounts and the amount of charity care. Many institutions book their full charges as revenue and then deduct for trade discounts under discounts and “allowances” and for charity care under bad debt written off and under “uncompensated care.” Tomkins et al. (2006) reported that the ratio of gross revenue (charges) to net revenue (payments received) has grown from 1.1 to 2.6 over a 25-year period. They report that cross-subsidization of services and differential pricing might be difficult to change in the current marketplace.
Currently, every hospital has a price list called a chargemaster that may have as many as 20,000 items. These are the charges that the patient usually sees. Terms are not standardized, and some items are really bundles of services so that patients still have trouble comparing prices between institutions. In California hospitals, reported charges for the same procedure at one hospital might be four times that of another, but on average, hospitals received reimbursements for only about 38% of charges from patients and insurers in 2004. Reinhardt (2006) argued that pricing practices would have to change radically if patients were to make rational buying decisions, and he seemed to support the recommendation of Porter and Teisberg (2006) that hospitals post one set of bundled prices per disease entity and charge the same to everyone. However, Altman et al. (2006) wondered whether transparent pricing and customer sensitivity to pricing might send hospitals down the same path as the unstable airline industry.
Responding to Cost Shifting
Employers and private insurers became increasingly aware of the effects of cost shifting and adopted a number of measures to counter it and combat the overall inflation in the costs of care under the general heading of managed care. Most of these measures already existed in one form or another somewhere in the country, but they had been spreading slowly until the 1980s. Employers moved away from contracts that accepted providerestablished fees from any provider and instead signed up with health maintenance organizations. Figure 3-2 illustrates the roughly 60% decline in market share for traditional indemnity plans from 1988 to 1998. The HMO/POS (HMO plus point-of-service) and PPO (preferred provider organization) plans appeared much better able to control health care costs by exacting their own discounts and by constraining what patients and providers would be able to do.
The Blues began to lose their not-for-profit identity and their focus as community-based cooperative organizations as they competed with the newer for-profit insurers. They often developed their own HMO organizations. By now, the concept of the HMO was no longer a prepaid group practice. It had become an organization that managed the insurance risk and the delivery of care either directly or through a designated provider network. HMOs (for–profit and not–for–profit) continued to negotiate with individual providers, group practices, hospitals, pharmaceutical companies, and all other types of providers for deeper and deeper discounts.
1985 (Not 1984): The Big Step Toward Industrialization
George Orwell warned about Big Brother watching us in his novel 1984. For health care, he was a little early, but not much. While HMOs existed, they really lacked an effective classification system to make comparisons on a scale suitable for managing care. The introduction of diagnosticrelated groups led to prospective payment (payment per admission by diagnosis) systems that eliminated some cost outliers first for Medicaid and Medicare and then for the HMOs. Having a uniformly defined cluster of cases to follow allowed for the development of classification and information systems and for internal and external oversight of care. Utilization review became a major activity of insurers, and decisions about whom to retain in the service network could be based on profiles of the cases treated by providers and institutions.
EMPLOYERS WANT OUT: BACKING FOR CONSUMER–DRIVEN HEALTH CARE
Throughout the 1990s, observers argued that the United States should move rapidly in the direction of a less regulated national market in health care, as the Reagan Revolution and success in the Cold War led economists and politicians to seek deregulation and consumer sovereignty in all areas. Commentators, such as Herzlinger (1997), pointed to the disappointing results coming out of managed-care contracts and argued that the only way to control health care costs would be to motivate consumers to take more responsibility for their own buying decisions. They noted that neither patients nor providers were fully aware of what things cost, and patient pocketbooks were not affected significantly by the choices made. Providers were likely to benefit from waste and overutilization that were not of concern to consumers who were not payers. The only way to get costs under control, they argued, was to create as much of a market system in health care as the nation had begun to make in other professional services areas. At the same time, the Internet was opening up relatively painless access to medical information for consumers. Payers and insurers established standard sets of provider report cards that purported to rank local providers in terms of their quality of care and costs. They increased deductibles and co-payments and launched experiments to test various pay-for-performance schemes that rewarded desired quality and cost-related behaviors.
Corporations began to assess the impact high employee and retiree health care costs had on their ability to price goods competitively. Increasingly, their competition came from countries where the overall tax system supported much of the costs of health care. They began to support strongly the notion of a defined benefit package (a set dollar amount) and move toward a health care market in which employees would take more responsibility for expenditures and for selecting effective care.
Consumer-driven health care insurance contracts fall into two groups: tiered programs and reimbursement accounts. Tiered programs are of two types: (1) tiered premiums and (2) tiered point-of-care cost sharing. The first type gives employees premium benefits in return for accepting higher co-payments and deductibles, a more-restrictive network, or less freedom from utilization review. The second type allows cost sharing for those who choose providers deemed to be preferred providers based on cost and/or quality measures. The publicity, of course, has been attached to the health reimbursement account arrangements, especially tax-sheltered health savings accounts. Typically, the employer establishes an account for the employee to spend on health care. Then a large deductible comes into play and insurance kicks in when the total of these two is exceeded. Unexpended money in the initial account often can roll over from year to year. So far, employer payments under these programs seem to be considerably less than under traditional health insurance. It is unclear how much of the difference comes from reduced utilization, from higher out-of-pocket payments, or from more knowledgeable purchasing decisions (Rosenthal & Milstein, 2004). Davis (2004) suggested that the success of these innovations will ultimately hinge on whether the public sees it as measure to shift costs from employers to employees or whether it motivates provider institutions to “identify, demand and reward high performance, with positive incentives for consumers in a complementary role” (p. 1230).
The Resulting Picture
Currently, the U.S. government and private sector are operating with a hodgepodge of approaches. Medicare and Medicaid are monopsonistic, administered systems. The George W. Bush administration has emphasized consumer-driven health care, a free-market concept focused on health savings accounts. Federal health care policy since the Nixon administration has also tended to support development of large HMOs, examples of oligopolistic competition. Consolidation into larger multisite firms continues to take place both locally in hospital markets and nationally in subsectors such as kidney dialysis centers, nursing home chains, pharmaceutical distribution, medical oxygen distribution, and rehabilitation centers. Three firms of some 80 dominated enrollment for Medicare Part D in 2006. At the same time, successive congressional budgets have reduced funding for Medicare and Medicaid, creating new concerns about cost shifting to insurance programs already burdened with the costs of the uninsured and underinsured.
Each of these contending metaphors and philosophies—administered competition, oligopolistic competition, and free-market (consumer-directed) health care—is rooted in our health care system’s past and present. It is not clear what role they will play in that system’s future.
CONCLUSION
Like any other democracy, the United States has a system of health care that evolved through a political process influenced by trends in culture, technology, demographics, political ideology, and economic development and through experimentation. When something did not work or stopped working, other things were tried. Those countries coming out of a socialist background have been moving toward decentralization and allowing more of a private sector. Those who started out with a private insurance system have had to add more and more government funding to deal with aging populations and burgeoning technology. There is little reason to believe that what has worked in one time and place will necessarily work in another, nor that what has not worked in one time and place could not be made to work in another. A review of the efforts in many countries shows that there is no magic bullet, that the health care system is the product of a social context, and that many measures and many accommodations are needed to achieve good care at reasonable cost. Where the United States has paid a high price is in its lack of ongoing health policy development with adequate testing of potential interventions and adequate study of new alternatives before the political system becomes disappointed and acts again, often without sound, disinterested policy advice.
Case 3–1INTERNATIONAL COMPARISONS: WHERE ELSE MIGHT WE HAVE GONE?
It can be useful to consider the roads not taken—the different systems that have evolved in the other developed countries. This case study briefly reviews the health systems of five developed countries for which data are readily available: Canada, the United Kingdom, Australia, Germany, and Japan. The discussion questions at the end ask you to contrast and compare these systems with the U.S. system and among themselves. The variety of approaches taken is amazing, yet all seem to be producing similar results (except costs). Satisfaction surveys for the four English-speaking countries show similar ratings of consumer satisfaction and quality of medical and hospital care; however, self-reported access and expenditures differ widely.
DIFFERENT CULTURES, DIFFERENT SYSTEMS
Canada
Canada started out with a health system very similar to the United States but consciously switched to a very different system in 1971. The key differing aspects of the Canadian system are as follows:
•Universal coverage under provincial health plans financed through value-added and income taxes. Many Canadians have private insurance to cover costs the government does not pay for and to provide more rapid access to scarce services.
•Private medical practices and regional hospitals. Hospital authorities have a fixed budget. Physicians are paid according to a government-established fee schedule. Prices of prescription drugs are also affected by government regulation.
•Hospital financing of new technology or facilities through the provincial budgeting system, not capital markets. Adoption of new technology such as imaging equipment and surgical capacity is slower than in the United States.
•Rationing through delays in elective services, not through ability to pay. Lengths of hospital stays have not gone down as rapidly as in U.S. hospitals. Physician visits per person are similar in both countries, but the percentage of GDP devoted to health care has grown much more slowly than in the United States. Canada has fewer physicians per 1,000 population (2.1 vs. 2.4) but more nurses (9.9 vs. 7.8).
•Concerns about access to specialists and primary care after hours. Canadians express about the same level of satisfaction with their health care as U.S. respondents, but complain a little more about the shortness of physician visits.
•Accelerating growth in per capita spending on health care. Although it slowed sharply after 1971, it has picked up since, despite long waits for scanning procedures and “elective” surgery such as hip replacements, cataract removal, and cardiovascular surgery.
•Per capita health care spending is somewhat lower than in the United States and health outcomes slightly better (Table 2-1). No one is sure how much leakage of services and expenditures takes place across the border between the two countries, with U.S. citizens purchasing pharmaceuticals in Canada and Canadians purchasing scarce physician and hospital services in the United States.
United Kingdom
The British National Health Service (NHS) became a socialized system in 1948 after a gradual movement through voluntary and then mandatory health insurance. The government then owned the hospitals and employed physicians and other provider staff. A very small private insurance market was allowed. It has grown in recent years, and a number of physicians practice outside of the NHS. In London, they are referred to as the “Harley Street” physicians catering to the wealthy.
•In 1995 (under Margaret Thatcher), administration of the system shifted to local authorities that administer the tax revenues allocated to health in areas that cover about a half-million people each.
•Partly because of outmigration, the number of physicians per thousand patients is slightly lower than in the United States; however, British nurses do many things physicians would handle in the United States, including delivering babies, and more are available (9.1 per 1,000 in the United Kingdom vs. 7.9 in the United States).
•Rationing has been based on waiting times for treatments for nonacute conditions. These have included cataract removal, hip replacement, and coronary artery bypass surgery, for which patients may wait as much as a year.
•Primary physicians—general practitioners—are the entrepreneurs of health care. They are grouped together into primary care fund-holder trusts that cover about 100,000 individuals. The trusts accept capitation, incentives, and allowances, and then negotiate contracts with specialist physicians and local hospitals. These primary care fund holders are similar to U.S. independent practice associations, except that they are geographically focused, they are responsible for community health and quality improvement activities as well as acute primary care, and primary care physicians can belong to only one trust and each enrollee has a designated primary care provider.
•In 2004, the NHS adopted a pay-for-performance system for family physicians that involved 146 quality performance measures. According to Doran et al. (2006), primary care practices met targets for 83% of patients and achieved 97% of the possible points, much more than the 75% anticipated in the budget, resulting in an average of more than $40,000 in additional payments per physician. The result was a substantial budget overrun. One question still open, because a major baseline study was not performed, is how much of the improvement was due to changed medical care and how much was due to improved documentation.
•Consultants (specialists) are usually salaried by the NHS and have their offices at hospitals. General practitioners do not follow patients into the hospital. Specialists may also be allowed to take some private-pay patients.
•Long queues were a major political issue in the 1997 elections that brought back the Labour government. That government increased NHS funding, and waiting times dropped. Some management decision making was also decentralized from the regional health authority to the local hospitals, whose accountability for quality and cost was increased. At the same time, the government established the National Center for Clinical Excellence to evaluate procedures, treatments, and technologies and to speed their adoption if the evidence is adequate and favorable. This was in response to reliable evidence of differences in treatments and outcome differences among various geographic areas, regional health authorities, and fund-holder groups.
•The primary care trusts have been successful and survived economically.
Australia
Australia has a hybrid public–private health care system. A-national health care system called “Medicare” is financed out of taxation, including a Medicare levy based on taxable income. When established in 1984, the Medicare fund supported government hospitals and medical care and prescription drugs for the indigent, and it provided grants to state and territorial governments to operate hospitals. The addition of 1.5% to 2.5% to the levy in 1999 extended the same benefits to the general population. Private insurance is used to pay “cost sharing” fees and provide access to private hospitals, specialists, and physicians. About 40% of Australians have private insurance, which the government says pays 11% of health care costs.
•Australians seem to have less access problems overall than Canadian and U.S. patients, but they report problems accessing care on nights and weekends and paying for prescription drugs.
•An Australian entering the local public hospital can decide whether to do so as a public or a private patient. A public patient receives free hospital and physician care. A private patient receives a choice of doctor and must pay some minor charges, but most charges are covered by a combination of Medicare and private insurance.
•Under a program called Lifetime Health Cover, those who join a private health plan before the age of 31 pay a lower premium over their whole lifetime. Two percent is added to the premium for each year of delay. This is to prevent “hit-and-run” enrollment when major expenses are forecast and maintain a larger, healthier overall risk pool.
•Community rating is required for private health insurance funds. A system of “reinsurance” redistributes the costs of claims among insurers to avoid winners and losers among funds.
•To reduce reliance on the public funding, a 30% government rebate on private health insurance was introduced in 1999.
•There is also a government subsidy for long-term care of older persons, which includes institutional, community-based, and in-home support. In return, the government controls the supply of long-term beds.
•In 2003, Australia had 2.6 physicians and 10.2 nurses per 1,000 population compared with 2.4 and 7.9, respectively, in the United States.
Germany
Chancellor Otto von Bismarck is credited with starting the first national health insurance program in the 1880s. It is centered in 252 not-for-profit sickness funds that negotiate with labor unions, employers, and providers. Employer associations, labor unions, and provider associations interact quite formally. Some physicians are partners, and some are employed. All individuals must have some form of health insurance.
•The premiums of the unemployed (currently a high percentage in Germany) are paid by the federal unemployment insurance fund. For retired workers, premiums are paid by the worker’s pension fund. Coverage is universal one way or another. Workers have choices among funds, but they tend to be linked to an industry or a locale. Premiums are assessed on a graduated scale based on income. Co-payments have increased in recent years to cover revenue shortfalls.
•Physician associations receive a fixed amount per person per year, as do hospitals. Hospitals pay hospital-based physicians’ salaries from their capitation income. Ambulatory-care physicians are paid either a fee for service or the physician associations pay them a salary from capitated revenues. They generally cannot follow patients into the hospital.
•Doctor visits are shorter and more frequent than in the United States, and hospital stays are longer; however, the hospital staffing ratios are much, much lower.
•Germany had 3.4 physicians and 9.7 nurses per 1,000 population in 2004 compared with 2.4 and 7.9, respectively, in the United States.
•Germany has the third highest percentage of GDP devoted to health care after the United States and Switzerland. Because of cost increases, high unemployment, and an aging population, a 2006 political compromise increased premiums to an average of 14.7% of salaries in 2007. Premiums are pooled, and each insurer receives the same premium per enrollee in an attempt to force some efficiency improvements.
Japan
Employment-based health insurance is at the core of Japan’s health system, and it continues to produce the best health outcomes of any of the systems mentioned here; however, some ascribe much of the differential outcomes to demographic and lifestyle issues, especially diet.2 There is also a national health insurance program financed with national and local taxes. Premiums are scaled to family income. Households not covered by employment-based insurance must belong to community insurance programs under the national plan. Retirees are covered by their employers or their community plans.
•The government sets fee schedules for physicians at a level much below U.S. rates. Fees are identical for all plans; however, patients often add 3% or 4% “gifts” to their payments.
•Hospitals are both nonprofit and for–profit and may be owned by doctors.
•Most physicians work out of large clinics, some associated with hospitals, and are reluctant to send patients into the hospital, as they cannot follow them inside.
•Specialists are hospital employees and earn less than primary care physicians.
•Clinics usually dispense their own drugs.
•Japanese patients have many more, briefer visits and many more prescriptions than their U.S. counterparts. They also have many fewer admissions, although lengths of stay tend to be much longer.
•There are much fewer doctors per capita in Japan than in the United States, and waiting lines tend to be managed on a first-come, first-served basis.
•Japanese hospitals are considered by many to have somewhat outdated equipment and shabby facilities. Physicians do not seem to be customer oriented or highly motivated to meet patients’ affective needs.
Other OECD Countries
Most other Organization for Economic Cooperation and Development (OECD) countries have more physicians and nurses per thousand population than the United States. The Netherlands has one of the highest ratios of nurses (13.6 per 1,000) and recently increased the roles of nurses in primary care. France, Sweden, and Spain had high ratios of physicians per 1,000 population (3.4, 3.3, and 3.2, respectively) (Grol, 2006).
SOME REPEATING THEMES
A number of themes seem to recur in the systems of these various countries. Some represent ideas tried already in the United States, but all might be considered as possibilities as the U.S. system changes over the next 10 to 20 years.
Universal Coverage
Health care is provided to all. Often it is through a patchwork of public and private funds, but every effort is made to have everyone in the system. General tax revenues (income and value added taxes) are used extensively to fund health care, but in most cases, there is a mixture of additional revenue sources, including patient co-payment, employment-based insurance, retirement funds, local government revenues, and private insurers. This patchwork of payment mechanisms does not leave large gaps of uninsured or underinsured citizens. Private insurance and private care are available to those who choose to pay more. Where co-payments are required, a careful effort is made to make sure that ability to pay does not control access to basic care.
Hospitals Are Budget Constrained
Since the introduction of prospective payment based on diagnostic-related group classifications, hospitals in the United States have operated more as cost centers than revenue centers. A number of countries have established global hospital budgets or capitation budgets for hospitals, often administered through local authorities or trusts. Capital investment is constrained to avoid a hospital arms race.
Specialists Are Salaried and PCPs Are Incentivized
Income of the universal coverage system is used to pay the salaries of specialists, whereas fee-for-service payments reimburse the primary care providers. They serve as gatekeepers for referrals to specialists and hospitals and do not follow patients into the hospital. They are motivated, therefore, to avoid unnecessary hospitalizations. The British experiment with pay-for-performance was sufficiently successful that Epstein (2006) argued that its time has come for the United States. One might also see it as a way to boost the incomes of primary care physicians in the United States sufficiently to attract new practitioners to bolster the currently dwindling supply (Basch, 2006).
Large Premium and Risk Pools Are Maintained
Individuals are compelled to belong to one health plan or another. Young and healthy individuals cannot opt out, or where they can, incentives are provided to try to keep them in. Trusts serve very large employers, but the needs of small businesses and individuals are met through required community rating, local community health plans, and tax subsidies. Large premium and risk pools are built in to level the playing field and hold down administrative and marketing costs.
Systems Integration
The integration of the system is provided at the governmental rather than the institutional level. Circuit breakers in the system, especially between hospitals, specialists, and primary care practices, keep individuals and institutions from maximizing utilization. Incentives focus on motivating primary care physicians to control costs and improve quality.
Rationalization and Standardization
A trend toward decentralization of health care services is offset in part by setting up staff units that analyze and report on current medical technology, evidence about best practices, and evaluation of the cost-effectiveness of common interventions. These recommendations will probably be worked increasingly into pay-for-performance systems.
Labor Substitution
Many countries with lower costs seem to have not only lower professional incomes, but also substitute nurses and pharmacists for physicians, and physician generalists for specialists in their delivery systems.
Pharmaceutical Costs
Some countries constrain or ban direct-to-consumer advertising for prescription drugs, a cost that has grown to $4.8 billion annually in the United States, and rely on recommendations to physicians for decision making. The profit margins of pharmaceutical companies are constrained through a number of mechanisms, depending on what alternatives exist for payment in the national system. In a few cases, physicians are allowed to supplement their revenue by dispensing in their practices.
1 The cost of a nurse’s time is incurred when she or he reports to work, and thus, it is fixed regardless of whether there are six patients rounded or three or whether a team approach is used. That time is also jointly shared among all the patients the nurse serves. Few systems recorded nursing time by specific tasks.
2 Henderson (2002), while agreeing with this, also cited cultural aversion to invasive procedures and underreporting by at least 1.5% of GDP, by excluding medical care preventive services, under-the-table payments for access, maternity care, and private room charges.
CHAPTER 4 Where Do We Want to Be?
Even in a country that lacks an overall health policy, this is a useful question: How unhappy are we with our health care and what do we want to change? Do not expect the American public to respond consistently. When the Clinton health plan was being debated, a number of organizations surveyed the public. The public reported that they believed that the health care system was in trouble. At the same time, they expressed satisfaction with their own largely employer-financed health care programs. Public support for universal coverage was strong, but individuals did not want to pay higher taxes to support it (Peterson, 1995). An ABC New/Washington Post poll in October 1993, showed the following (Schick, 1995):
•51% of the public favored the Clinton health plan
•59% thought that it was better than the existing system
•Only 19% thought that their care would get better under it, and 34% thought worse care would result
•However, 57% were against tax increases to pay for it, whereas 40% would be willing to pay.
This parallels the common situation where voters report that they want to throw out the rascals in the capitol, but their own incumbent, whom they know, is all right.
ALIGNMENT WITH THE REST OF SOCIETY
The democratic process is likely to generate many policy experiments as we cope with changing technology, changing demographics, political pressures, and economic fluctuations. These experiments will continue to stir debate about the merits of the many delivery and payment alternatives available today in the United States and elsewhere.
For professionals in leadership positions, this is probably an unpleasant reality because it makes it much harder to plan and implement any institutional strategy. Even the most prestigious institutions are affected by these external drivers. For example, the Finnish national orthopedic hospital, the Orton Hospital in Helsinki, had to downsize and reach out to private pay individuals when the Finnish federal government chose to decentralize its jointly financed government health care program and pass administration on to local governments (Masalin, 1994). These local governments then attempted to control the rising cost of health care by reducing referrals to central specialized hospitals. Orton Hospital was a national resource of high quality, but as the referral patterns of the country changed, it too had to change the way it functioned in order to survive.
WHO IS THE “WE” IN “WHERE DO WE WANT TO BE”?
There is no universal “we” in health policy. There are interest groups, each of which has a central point of view. Within each group are many individuals with some diversity of views. They may be willing to compromise on some issues but not on others.
What Do Providers Want?
Providers are aware of their responsibility to act in the best interests of their patients. They are also inculcated with the “first do no harm” dictum. Even among the “disinterested” parties, some care most about individuals, whereas others focus on populations. This is often a vexing problem for those clinicians who, although committed to the needs of individual patients, are also trained in statistical thinking and population-based approaches.
Provider professionals want professional autonomy, income stability, and growth comparable with their peers, successful outcomes for their patients, a sense of mastery of their field, and the respect of the public. They know that they will make some mistakes but will work very hard to avoid them. They do not want to put their careers on the line with every decision. They do not want to waste energy in silly bureaucratic exercises that consume resources and distract them from effective care. They also would like to see provisions to pay for care for the uninsured. They are aware that these individuals often forgo normal care and may end up later with more serious and costly problems. That is why some hospitals and health maintenance organizations (HMOs) have strongly endorsed state plans to cover the uninsured, even when they involve adding a tax on their bills to paying patients. Table 4-1 illustrates some of these desires as expressed in the American Nurses Association’s Bill of Rights for Registered Nurses.
Professional Autonomy
TABLE 4-1American Nurses Association’s Bill of Rights for Registered Nurses
1.Nurses have the right to practice in a manner that fulfills their obligations to society and to those who receive nursing care.
2.Nurses have the right to practice in environments that allow them to act in accordance with professional standards and legally authorized scopes of practice.
3.Nurses have the right to a work environment that supports and facilitates ethical practice, in accordance with Code of Ethics for Nurses with Interpretive Statements.
4.Nurses have the right to freely and openly advocate for themselves and their patients without fear of retribution.
5.Nurses have the right to fair compensation for their work, consistent with their educational preparation, knowledge, experience, and professional responsibilities.
6.Nurses have the right to a work environment that is safe for themselves and their patients.
7.Nurses in all practice settings have the right to negotiate, either as individuals or collectively, the conditions of their employment.
Source: Reprinted with permission from American Nurses Association, ANA Bill of Rights for Registered Nurses, © 2001 Nursesbooks.org, Silver Spring, MD.
The professional mystique of physicians in the past rested on their control of information. Those who favor a consumer-centric, free-market approach to health care decision making want to maximize the amount of information available to consumers. This has led many physicians to argue for privacy in the conduct of their practices, often in the name of protection of business secrets and personal privacy. Many physicians object, for example, to the fact that a drug company’s local sales representative has data on their prescribing behaviors (Saul, 2006). Insurers certainly profile physicians and institutions for costs and outcomes regularly, and they make aggregated data available to employers and the National Committee for Quality Assurance (NCQA).
Employer representatives want more information to be available to consumers. One thorny issue is information on individual physicians. President George W. Bush has called for “transparency in the marketplace” and urged private insurers to disclose data on physician costs and outcomes; however, when the Business Roundtable called on the federal government to make its Medicare databases available, the administration cited a 1979 court ruling protecting the privacy of physicians and prohibiting disclosure of Medicare payments to individual physicians (Pear, 2006). NCQA has offered the following conclusions and policy recommendations:
1.Conclusion: Measurement and public reporting reduce variation and improve quality, but the effects have been limited because the practice is not widespread. The shift of consumers into health plan models that are less accountable than HMOs threatens continued improvements. Recommendation: Encourage and reward public accountability from all sectors of the health care system.
2.Conclusion: The U.S. health care system is still saddled with anachronistic payment systems that reward quantity, not quality, of care. This contributes to widespread variations in the way health care is delivered—from failure to deliver needed care to huge numbers of unnecessary procedures that drive up costs and endanger patients. Recommendation: Support pay-for-performance strategies that reward physicians, hospitals, and health plans for improving quality.
3.Conclusion: Because measurement and public reporting are not yet commonplace except among HMOs, consumers lack information with which to make informed and fiscally sound decisions on their own. Recommendation: Encourage and offer incentives to doctors, hospitals, and health plans to take part in public accountability efforts and steer consumers to only those plans and providers that participate (NCQA, 2006).
This is a difficult area. Professionals, like other business people, have some rights to privacy and to the prying eyes of competitors, but some observers see the current tensions as the last gasp of a professional monopoly and an attempt to withhold information that bolsters purchaser sovereignty at all levels. Yet the public lacks sufficient knowledge to interpret much of this information effectively. Current techniques for evaluating case mix and adjusting for risk are crude at best. Measuring the outputs of medical interventions is difficult unless one knows that the inputs are comparable or unless there is a way to adjust the data to reflect those differences in inputs, especially the condition of the patient going in.
Other professions fight hard to overcome the dominance of physicians. In many countries, pharmacists are much freer to dispense independently. Nurse practitioners and midwives have fought state by state for the right to practice independently. Psychologists have been fighting some of the same battles with respect to prescribing for the mentally ill, whereas more and more types of counselors want to be able to bill Medicare, Medicaid, and private insurance.
What Do Patients and Their Families Want?
Patients want to beat the odds. They and their families want the best possible outcome, and they want to know that everything that was possible was done to assure recovery or a comfortable death for their loved ones. Some want miracles. All want respect and caring. Most know that they need experts to look after their interests, but still want to be kept informed of what is going on so that they can make sense of what is happening and avoid serious medical errors. Again, the issues are complex. Patients and families want to have access to quality information if they have the time and energy to make their own decisions. At the same time, they employ the provider as their agent, and the sicker they are, the more they tend rely on the clinician’s judgment.
When they are not terribly sick, they also worry about the cost of their care. They do not want to spend a lot of time in the waiting room or figuring out how to fill out paperwork. That is a nonmonetary cost, but a cost to them, nevertheless. It can also be a monetary cost if they lose work hours or reimbursement opportunities because of it.
They want to know that they were not treated unfairly by any part of the health care system and that their treatment was not affected by their gender, their ethnicity, or the color of their skin. They would like to think that it was not affected by their pocketbooks, but probably believe that to be a bit unrealistic.
They also become concerned when they believe that profitability concerns or payment mechanisms are biasing the selection of treatments they receive. An example has been the debate over whether the drugs chosen by oncologists for outpatient treatment have been chosen for their effectiveness or their profitability (Abelson, 2006a). Increasingly patients are aware of the financial incentives affecting providers that in the long run can undermine provider legitimacy (Schlesinger, 2002).
Individuals do not want to be denied insurance on the basis of prior medical conditions over which they have little or no control. Yes, some, particularly those sometimes referred to as the “young immortals,” are willing to gamble and “go bare” (not carry insurance) if they perceive a relatively low probability of a catastrophic event. This raises the issue of free riders getting emergency care even though they are not making provision for paying for it ahead of time. An even thornier problem is the moral hazard of those who knowingly indulge in high-risk behaviors for which the general public will have to pick up a share of the costs.
What Do Insurers Want?
They want to be free to play the odds. They want to be able to make an acceptable level of profit whether they are a for-profit or a not-for-profit organization. They want to be able to compete in the marketplace on a “level playing field.” Their customers are the payers—the employers and the group and individual enrollees—and they want to maintain a good reputation with them. In the HMO and preferred provider organization (PPO) world, payers want the biggest possible discounts from providers to keep their medical loss ratios competitive.
Insurers also want to avoid adverse selection. They want protection against having those who know they have a higher than average probability of a claim joining their system, whereas those with a below-average probability of a claim do not. They do not want to be in a situation in which they are disadvantaged vis-à-vis other insurers. They would like to continue to compete on marketing skills, on underwriting ability, on investment returns on their reserves, and on their operating efficiencies.
Insurers, however, are very sensitive to market shifts. For example, many are currently developing new insurance products for individuals and small groups as the notion of consumer-oriented care increases customer demand for those products (and as employers reduce their contributions and coverage). They suddenly seem interested in the individual subscribers that they ignored a few years ago.
What Do Employers Want?
They want competent, productive employees and competitive cost structures. They are not in the health care purchasing business for any other reason. They are generally supportive of consumer-driven health care that allows individual consumers, rather than employers, insurers, or provider organizations to make more decisions than in the past. This effectively shifts more of the costs onto the employees and from the lowest paid employees onto Medicaid.
Large Employers and Unions
In unionized firms, premium payments are set through collective bargaining between the company and the unions. This bargaining can expand or contract the health care benefits, depending on the wants and needs of the employer and key groups within the union. After a period during which many of our bitterest strikes were waged over health benefit issues, both sides are now recognizing that employment-related health care costs can reduce domestic employment by encouraging companies to shift production to other countries. Employers are rapidly limiting their liabilities to specific dollar contributions toward health care for employees and retirees.
Galvin and Delbanco (2006, p. 1549) summed up the desires of large-and mid-sized firms as follows:
•Cost control without jeopardizing their ability to attract and hold good workers
•Immediate improvements without heavy investments
•A more productive workforce through health improvement
•Approaches that “focus on individual responsibility, competition, and market forces”
•Avoiding government mandates or other interventions that “bar customized solutions for their firms.”
Small Employers
Because health care insurance risks are reduced by pooling large numbers of beneficiaries and because administrative costs and insurance prices are very sensitive to the number of individuals being covered, small businesses find it hard to provide competitive health benefits to their workers. They need either subsidies or effective ways of pooling their people with others to make a viable enrollee population.
What Do Governments Want?
They want a satisfied public. They want health care expenditures to be predictable and at a level that does not disadvantage economic growth in both domestic and international competition. The system should work within the parameters of accepted cultural norms of equity and fairness so that it does not foment unnecessary voter dissatisfaction. All levels of government want to keep costs down, especially Medicaid costs, so as not to crowd out other programs or increase taxpayer unhappiness. Federal, state, and local governments are also concerned about their longer term liabilities for the viability of Medicare trust funds, Medicaid costs, and their accrued liabilities for government retiree health benefits.
Federal Government
It purchases health care on behalf of special populations: the poor, the older populations, veterans, active duty military, Native American, and so forth. It pays for more than 40% of health care purchases (and covers more than 60% of patients in some markets). Children have actually fared better in federally purchased health care since 2000 because of the 1997 startup of the State Children’s Health Insurance Program. Federal programs, which are highly sensitive to political pressures, have tended to rely on their purchasing power to garner deep discounts. (Only recently have governments begun to demand and pay only for the use of best practices.) Because of the low federal reimbursement rates, some providers refuse to participate in federal and state programs, further reducing access and availability.
State and Local Governments
Their interests are much more limited, involving Medicaid and local programs for the uninsured poor. Their revenue streams are limited and inflexible, often being tied to real property taxes that cannot adapt rapidly to changing economic conditions. On the other hand, revenue restraints have encouraged innovation. State and local governments cannot print money to cover deficit spending. Despite all of the rhetoric at the national level, most experiments that have been implemented to control health costs have occurred at the state level. States concerned about access issues are increasingly discouraged about the prospects of a coherent national health policy coming out of Washington DC anytime soon, so states such as Maine, Vermont, and Massachusetts are experimenting with systems to provide universal coverage using a variety of funding sources. The governors of more than half the states have proposed measures that include one or more of the following approaches:
•Mandated insurance coverage for all citizens
•Mandated employer coverage or payments into insurance pools in lieu of coverage
•Mandated lower premium individual policies from insurers
•State coverage for all uninsured children
•Tax credits and deductions for individual insurance premiums
•Special discounts for prevention and healthy lifestyles
•Calling for expansion of Medicare to cover the uninsured (Barry & Basher, 2007; Solomon & Wessel 2007).
Governments are also concerned about appropriate access for their constituents. Case 4-1 provides the example of U.S. Department of Health and Human Services standard for Culturally and Linguistically Appropriate Services (CLAS). Some parts of this standard are mandatory for services paid for with federal government funds, whereas others are guidelines.
What Does the General Public Want?
Members of the general public want to feel that they and their families are safe and that the system will treat them fairly and effectively if and when they need it. That calls for assured access to health care which means assured health insurance coverage. They also do not want to feel guilty about the suffering of their 47 million uninsured fellow citizens. At the same time, they are not enthusiastic about using the tax system to cover the needs of others. They do not want to be treated in a way that marks them as a member of any underclass, but want to be treated as middle class or above.
Americans seem unwilling to pay more than the current proportion of national income (about 16%) for health care, yet the inflation rate in health care continues to exceed the rate of growth in our overall economy (growth in gross domestic product). International economic comparisons have shown a close relationship between national income and per capita health expenditures. Wealthy nations spend more per person. This would seem to indicate that part of the cost of health care is related to need, part is related to availability, and part is related to decisions people make as consumers.
Individual Insurance Purchasers
The problems affecting small business are even worse for the self-employed seeking coverage. Premiums are highest and rejections frequent. Those with preexisting conditions are essentially excluded from the market. Many end up going without coverage. Yet the self-employed often have an advantage over the working poor who are unable to obtain insurance through their employer—either because it is not offered, because they only work part time and are not eligible, or because it is optional and they cannot afford the added expense.
What Do Policy Wonks Want?
They want a system that is efficient, coherent, and rational and that provides effective care to the relevant populace. Health care competes with other services for scarce resources. Money spent on health care cannot be spent on transportation or public amenities; therefore, there must be some calculus for allocating scarce resources to health care and other meritorious causes on a consistent basis. Analysts are sharply divided on many other issues. For example, although many argue for measures to forestall continued growth in health care expenditures, others say, “Don’t worry—the U.S. citizenry can afford it and it constitutes economic growth and increasing employment even if it were to approach 25% of our economy.” Others say, “Yes, that is growth, but it represents a transfer of assets from the young to the elderly that is not sustainable.” Much care is effective and worth doing, but there is agreement that there is considerable waste and inefficiency, even though waste and inefficiency are income-enhancing for someone.
Examples of other areas of concern to policy analysts include the following:
•Free riders—individuals who could otherwise pay but avoid doing so while still relying on the system for help in case of a catastrophic event. Two possible solutions to the free rider problem are (1) universal coverage with a mandated payment and (2) mandated catastrophic insurance, usually with a very high deductible and low premium. Consider for example the contentious issue of motorcycle helmets. Those who do not want to wear them could be required to post a bond to cover their bills and perhaps sign an organ donor agreement to compensate society for the unnecessary risks taken.
•Overserved and underserved areas: Not only are health care resources limited by the willingness and ability of governments, firms, and individuals to pay, but available resources can be poorly distributed, resulting in surpluses in some areas and shortages in others. Governments and payers have attempted to regulate the supply of health services as well as the demand. One example of the regulation of supply is certificate of need legislation. In an attempt to regulate against an oversupply of health care capital investments, many states have legislation that requires independent review to determine whether additional investments are warranted. If not, the services they provide cannot be compensated for from state and federal funds. Examples of the types of capital investments reviewed include hospital beds, nursing home beds, cardiac catheterization units, and expensive imaging equipment. Legislation has also subsidized the building of hospitals and the posting of health professionals to serve needy populations.
•Withdrawal of services: Demand is constrained when payers restrict what they will pay for and how much they will pay for what is delivered. The absence of sufficient demand or reimbursement for services can lead professionals and provider institutions to withdraw from the market, downsize, or file for bankruptcy. Because of high malpractice insurance costs for obstetrical procedures, for instance, many obstetricians have stopped doing deliveries and only provide gynecologic services. Many hospitals have reduced their psychiatric beds, shifting the burden to the state institutions. Some withdrawals are responses to overcapacity in an area, but some are also the result of decisions that a particular line of services is bound to lose money.
Consensus Does Not Necessarily Lead to Action
By 2007 there seemed to be a consensus that we must do something about our 47 million uninsured. Coalitions, often of strange bedfellows, sprang up everywhere. States were experimenting with universal coverage plans and governors were proposing even more. Many groups urged the federal government to join in the solution. It has done so already by allowing federal monies, including Medicaid funds, to be used more flexibly by the states. There was, however, no consensus as to how universal coverage should be achieved. Some want national health insurance. Others want individuals to buy individual health insurance using vouchers and tax subsidies where necessary. Still others want the states to provide it with employer mandates, special taxes on insurers and providers, and/or subsidies for the poor and near poor (Solomon & Wessel, 2007). These will all likely be debated in the 2008 election.
Proposals to solve the access problem seldom mentioned much about the supply of services available or the impact of a large increase in volume on prices and costs. In the minds of many, universal coverage and costs seem to be separable issues. We learned that that certainly was unlikely to be the case when Medicare and Medicaid were introduced.
CONCLUSION
There are specific things that a majority or a plurality among each set of actors want to see happening in the health care system. For the most part, there are clear majorities on the need for providing insurance for all, controlling the rate of inflation, eliminating waste, improving quality, investing in the most beneficial programs, taking care of children and the older population, and pushing ahead with research to find cures for diseases. Yet there will be a vocal minority on just about every issue, from special interests and from people strongly representing economic and social ideologies. That is why the authors of this book believe in the importance of policy analysis as a way toward maximum possible rationality in decision making, reducing the number of ungrounded assertions and increasing our ability to deal with new evidence and new opportunities.
Case 4–1NATIONAL STANDARDS ON CULTURALLY AND LINGUISTICALLY APPROPRIATE SERVICES (CLAS)
In 1997, the Office of Minority Health (OMH) in the U.S. Department of Health and Human Services began work on national standards for culturally and linguistically competent health care. The stated goal was to help reduce health disparities. OMH published draft standards in December 1999 and solicited public comment through a variety of channels over a 4-month period. On December 22, 2000, it published the final standards. Although the standards are primarily directed at health care organizations, OMH encourages their use by individual providers as well as by policy makers, accreditation and credentialing agencies, purchasers, patients, advocates, educators, and the health care community in general (OMH, 2001).
CULTURALLY COMPETENT CARE (GUIDELINES FOR ACTIVITIES RECOMMENDED BY OFFICE OF MINORITY HEALTH FOR ADOPTION AS MANDATES BY FEDERAL, STATE, AND NATIONAL ACCREDITING AGENCIES)
Standard 1
Health care organizations (HCOs) should ensure that patients/consumers receive effective, understandable, and respectful care from all staff members that is provided in a manner compatible with their cultural health beliefs and practices and preferred language.
Standard 2
HCOs should implement strategies to recruit, retain, and promote at all levels of the organization a diverse staff and leadership that are representative of the demographic characteristics of the service area.
Standard 3
HCOs should ensure that staff members at all levels and across all disciplines receive ongoing education and training in culturally and linguistically appropriate service delivery.
LANGUAGE ACCESS SERVICES (MANDATED REQUIREMENTS FOR ALL RECIPIENTS OF FEDERAL FUNDS)
Standard 4
HCOs must offer and provide language assistance services, including bilingual staff and interpreter services, at no cost to each patient/consumer with limited English proficiency at all points of contact in a timely manner during all hours of operation.
Standard 5
HCOs must provide to patients/consumers in their preferred language both verbal offers and written notices informing them of their right to received language assistance services.
Standard 6
HCOs must assure the competence of language assistance provided to limited English-proficient patients/consumers by interpreters and bilingual staff. Family and friends should not be used to provide interpretation services (except on request by the patient/consumer).
Standard 7
HCOs must make available easily understood patientrelated materials and post signage in the languages of the commonly encountered groups and/or groups represented in the service area.
ORGANIZATIONAL SUPPORTS FOR CULTURAL COMPETENCE
Standards 8–13 are guidelines for activities recommended by the Office of Minority Health for adoption as mandated by federal, state, and national accrediting agencies. Standard 14 is suggested for voluntary adoption by HCOs.
Standard 8
HCOs should develop, implement, and promote a written strategic plan that outlines clear goals, policies, operational plans, and management accountability/oversight mechanisms to provide culturally and linguistically appropriate services.
Standard 9
HCOs should conduct initial and ongoing organizational self-assessments of CLAS-related activities and are encouraged to integrate cultural and linguistic competence-related measures into their internal audits, performance improvement programs, patient satisfaction assessments, and outcomes-based evaluations.
Standard 10
HCOs should ensure that data on individual patient’s/consumer’s race, ethnicity, and spoken and written language are collected in health records, integrated into the organization’s management information systems, and periodically updated.
Standard 11
HCOs should maintain a current demographic, cultural, and epidemiological profile of the community as well as a needs assessment to accurately plan for and implement services that respond to the cultural and linguistic characteristics of the service area.
Standard 12
HCOs should develop participatory, collaborative partnerships with communities and use a variety of formal and informal mechanisms to facilitate community and patient/consumer involvement in designing and implementing CLAS-related activities.
Standard 13
HCOs should ensure that conflict and grievance resolution processes are culturally and linguistically sensitive and capable of identifying, preventing, and resolving cross-cultural conflicts or complaints by patients/consumers.
Standard 14
HCOs are encouraged to regularly make available to the public information about their progress and successful innovations in implementing the CLAS standards and to provide public notice in their communities about the availability of this information (OMH, 2001).
DISCUSSION QUESTIONS
4. What would you change about these regulations if you were in charge at the U.S. Department of Health and Human Services?
CHAPTER 5 What Are the Governmental Alternatives? Many Actors, Many Proposals
The United States has tried an entire alphabet soup of health policy options: HSAs, HMOs, IPAs, PPOs, POS’s, IPAs, etc. Some have helped the system, and some have not; however, health care analysts must also look beyond specific organizational and financial alternatives and address issues at a higher level—dealing with the threads of economic and political thought that are behind individual proposals and with the overall criteria of access, cost, and quality of care.
Political and business figures from outside the health care sector currently advocate many alternatives. To offset their tendency to ignore professional issues, we designed Chapters 5 and 6 to include alternatives affecting professional status and roles and institutional responses to them, as well as the usual suspects—alternatives various actors would like impose from the outside. Table 5-1 presents an array of federal alternatives organized by their primary foci—access, quality, or cost—and then by the economic philosophies behind them. They are not intended to be either mutually exclusive or collectively exhaustive, but to provide a framework for looking at both the broad policy picture and specific health care actions taken at various times and places.
Further into this chapter, a second table summarizes policy alternatives added by state and local governments. Chapter 6 considers other actors, including payers, providers, and consumers. One can think of still others, but these seem sufficient for a review of current policy alternatives.
TABLE 5-1 Illustrative Federal Government Health Policy Options
Access to Care
• Administered systems
•Universal coverage
•Captive providers
•Single (or captive) payer system
•Expanded/reduced eligibility and benefits
• Oligopolistic competition
•Expand and contract coverages in entitlement and categorical programs
•Allow states to reallocate federal uncompensated care funds
•Eliminate ERISA constraints on the states
•Expand the capacity of the system
•Fund services for special populations
• Free-market competition
•Allow states flexibility to reallocate federal funds for vouchers
•Encourage basic plans with very low premiums for low-income workers and “young invincibles”
•Encourage portability of health benefits
Quality of Care
• Administered system
•Mandate participation in quality improvement efforts in federal plans and programs
•Add more pay-for-performance incentives
•Select providers and programs on the basis of quality excellence
• Oligopolistic competition
•Encourage or mandate transparency of quality reporting in federal plans and programs
•Encourage wider use of health information technology
•Conduct research on evidence-based practices with high-cost illnesses and procedures and facilitate dissemination and adoption
• Free-market competition
•Work reporting of quality care and adverse events into purchasing specifications for federal programs
• Oversee licensure and credentialing of foreign-trained providers
Cost of Care
• Administered system
•Reduce fees and subsidies
•Use full bargaining power in negotiation of fees and discounts
•Limit eligibility and covered services in entitlement and categorical programs
• Oligopolistic competition
•Expand managed care/disease management
•Bundle payments for services
•Subsidize capacity reductions
•Constrain anticompetitive practices
•Support community-wide development of health information networks
• Free-market competition
•Change policy on tax deductible status of employer-paid health premiums and individual health expenditures
•Support individual medical savings accounts
•Privatize parts of Medicare, Medicaid, and other federal programs
•Implement information and price transparency in federal programs and promote parallel industrial efforts
•Support consumer information reporting and database availability
•Constrain anticompetitive practices
• Other Interventions
•Research, development, and deployment
•Treatment methods (e.g., National Institutes of Health)
• Delivery system methods (e.g., information technology)
• Provider quality and availability
• Health and safety regulation
• Special situations and opportunities
Governmental alternatives are grouped according to their approaches to the health care marketplace: (1) administered system (monopsonistic), (2) free-market competition (assuming near perfect markets), and (3) oligopolistic competition. Figure 3-2 has already illustrated these market positions, as reflected in the distribution of buyer versus seller market power.
The federal government especially also has a large number of programs that make indirect investments in health care, such as research and development (National Institutes of Health (NIH), Agency for Healthcare Research and Quality (AHRQ), Centers for Disease Control and Prevention (CDC)), educational programs, and health care information technology initiatives. State and federal spending programs also influence the supply and training of health professionals and provide for traditional public health services. These have been put into a fourth section, as they seem to pertain to all alternative economic value systems.
FEDERAL LEVEL ALTERNATIVES
Access to Care—Administered System Alternatives
Under this approach, the government assumes the primary risk. The government certainly may try to influence the behaviors of the other actors, but in the end, it is patient pay, insurance premiums, and tax revenues that cover the costs of the health care system with the risks falling heavily on the tax system. Because a national government tends to respond to political pressures, administered systems tend to focus on access needs and then on costs. These two may take priority over other quality-of-care criteria such as continuity of care (McLaughlin, 1998).
The public sector in United States makes very heavy expenditures in health care, even though the private sector portion is large. In fact, recent World Health Organization data indicate that the United States not only spends more per capita on health care than most other countries, but actually spends more public money per capita than Sweden and the United Kingdom, which ostensibly have public systems (see Table 5-2). Similar results were reported by Grol (2006) based on Organization for Economic Cooperation and Development data.
Universal Coverage
Many countries operate with a nationally funded, controlled, and administered health care system. Despite the fact that nearly all countries have a policy on paper that promises universal coverage, only the developed countries have the resources to come close to fulfilling such promises.
Under a single-payer system, coverage is provided almost exclusively through tax revenues, although in practice there is often a parallel private sector based on private insurance or personal payments and a set of private providers. This allows those who can afford it the option of bypassing any supply constraints. In many less wealthy countries, health professionals work for the government part of the day and see private pay patients at other times. This is because government revenue is not sufficient to pay health professionals even a middle-class wage for their government service. Even where this private sector is technically illegal, it is usually tolerated as a reality of life. Where the coverage is universal and the resources are not sufficient, the services are just not delivered and/or a rationing scheme is put in place, especially for procedures that can be postponed.
Universal coverage is not synonymous with single payer. It can be financed by direct government payment, by mandatory insurance schemes (with mandates placed on employers, consumers, or both) or vouchers allowing subsidized purchase of insurance directly by the consumer, or by a combination of more than one of these. President Clinton’s Health Security plan, for instance, was designed to provide universal coverage but preserved the existing system of employer-based coverage. Those favoring consumer-centered care tend to favor vouchers because they believe that vouchers would lessen the tendency of insured patients to ignore costs and allow the recipients a better match between their preferences and the coverage they purchase (Feldstein, 2005).
Captive Providers
Providers can become captives of the governmental system either through employment or government control of the marketplace. Canadian physicians are not employed by the federal or provincial governments, but are unlikely to have much of a domestic practice unless they participate in their province’s single-payer system. In the United States, a number of governmental systems employ physicians, including military services, the Department of Veterans Affairs, the U.S. Health Service, and the National Health Service Corps, but altogether, the federal government employs less than 3% of the nation’s physicians. The majority of employed U.S. physicians work in the private sector for physician practice management companies (PPMs), health maintenance organizations (HMOs), academic medical centers, and other integrated service organizations.
Single (or Captive) Payer
Common use of “single payer” refers to a unitary health system such as British National Health Service; however, that need not be the case. Medicare is a single government payer for older people and those with disabilities in the United States, but one must meet eligibility criteria and must opt to pay for some specific coverages—for example, physicians and drugs. The government may also set up captive organizations or contractors to administer its programs or handle program disbursements.
Expanded or Reduced Eligibility or Benefits
If coverage is not universal, it may be selective. U.S. government health programs pay directly for more than 40% of health care costs. In recent years, the proportion covered has been slowly increasing as more children are covered each year and the Medicare drug benefit has begun to take effect. Some federal programs are paid from trust funds and some by taxation. A number of optional services can be provided under Medicaid if the states decide to participate. As their budgets dictate, governments may add or subtract from their list of optional services and covered populations. For example, the Trade Act of 2002 created a new category of coverage—displaced workers who became uninsured—in the form of Health Coverage Tax Credits, which paid 65% of the premiums for most COBRA continuation coverage plans of former employers or private health plans arranged by the states. The credits could go directly to the households or be advanced monthly to the insurer. Uptake has been slow, however, because the enrollees facing reduced incomes still have to fund the other 35%.
Access to Care—Oligopolistic Competition Alternatives
Oligopolistic competition is the normal state of affairs in American industry. It is also the case in health care, as many communities have only a couple of hospital groups and a few dominant practices. In the ideological battle between administered systems and consumer-centered care, this fact has gone largely unnoticed.
The federal government’s role under oligopolistic competition is limited, but it does have to be concerned about monopolistic practices and enforce the regulations governing commerce overall and health care in particular. It can also provide incentives for specific corporate responses. An example of government encouragement of industry change was the HMO Act of 1973.
Expand and Contract Coverage in Entitlement and Categorical Programs
Most American health care is delivered on a fee-for-service or managed care basis by private providers. The federal government, however, writes or at least approves the regulations that determine eligibility and benefits under programs such as Medicare and Medicaid and the end-stage renal disease (ESRD) program. It can expand or contract the groups to be covered in those programs, directly or by allowing waivers of regulations to the states.
Allow States to Reallocate Federal Uncompensated Care Funds
Many alternatives being worked out by the states involve reallocation of federal monies that have been going to the states to fund uncompensated care. The states may be allowed to reallocate these monies directly to purchase insurance or provide services for the uninsured, or they may pull them back from institutions through special taxes. Federal programs that currently fund uncompensated care, mostly through Medicare and Medicaid, include the following (McClellan, 2005):
•Disproportionate share hospital payments
•Indirect medical education payments
•Bad debt payments
•Section 1115 Medicaid waivers
•Section 1011 of the Medicare Modernization Act for emergency medical treatment
Eliminate ERISA Constraints on the States
Because the Employee Retirement Income Security Act (ERISA) of 1974 sets up two insurance systems, only one of which is under state regulation, a number of promising state and local initiatives have not gotten off the ground. Congress could amend this legislation to remove or weaken this exemption for self-insured employers.
Expand the Capacity of the System
Federal funding can be used to fill in any number of gaps in service programs and facilities. The Hill-Burton program (Hospital Survey and Construction Act of 1946), which funded so many small rural hospitals, is one example. Interestingly, that legislation called for the states to undertake systematic health planning to establish population-based needs for hospital beds and to create a licensing system for hospitals, and then it provided construction assistance to bring shortage areas up to a standard level of services. Many of these new hospitals had fewer than 50 beds and were located in rural areas that had completely lacked hospitals. Between 1946 and 1975, when Hill-Burton funding ended, about a billion dollars of facilities construction was put in place, with about 35% paid for with federal funding, and hospital beds per capita increased about 50%. Hospitals receiving Hill-Burton funding are still mandated to serve the local population with a certain amount of charitable care and care provided on a sliding-fee scale, although government enforcement of that provision has been limited.
Fund Services for Special Populations
The federal government has many categorical programs that support local case finding and service delivery to specific populations and disease groupings, including Native Americans, low-income children, ESRD, and HIV/AIDS. Access could be expanded by adding more such populations or programs.
Access to Care—Free-Market Competition Alternatives
Under this philosophy, the national government’s role is to try to mitigate those factors that might make the market imperfect. These include further reduction of regulations that influence the market, making sure that there are adequate numbers of competing providers (the supply side), making sure that buyers and sellers are free to move in and out of the market, and assuring that both buyers and sellers have maximum access to both services and information about price and quality.
Allow States Flexibility to Reallocate Federal Funds for Vouchers
One recommendation from those who would like to see greater consumer choice in programs aimed at improved access would be to give targeted individuals vouchers with which to purchase insurance or services directly. The arguments for this approach parallel those for school vouchers in education.
Encourage Basic Plans With Very Low Premiums for Low-Income Workers and “Young Invincibles”
One of the thornier problems in health policy is the free rider issue. Among the uninsured population are many young, healthy adults who have access to insurance but choose to go without it because their expected health care costs are considerably below the premium levels available. They might be lured back into the insurance market by very low-premium plans that cover only their likely health events, such as trauma and infectious disease. This is, of course, a two-edged sword because such programs might also motivate other healthy workers to leave existing programs, thus exacerbating the adverse selection problem for the remaining enrollees.
Encourage Portability of Health Benefits
A significant number of the uninsured are in and out of the labor force and in and out of employment-based plans. Efforts have already been made to help with interim coverage and portability from one employer to another, but much more could be done.
Quality of Care—Administered Systems
Mandate Participation in Quality-Improvement Efforts in Federal Plans and Programs
Increasingly, the Centers for Medicare and Medicaid Services (CMS) has insisted that institutional providers participate in quality-improvement programs. Often these quality improvement requirements are indirectly enforced through the third-party accreditation procedures of organizations like the Joint Commission on Accreditation of Health Care Organizations (JCAHO).
Add Pay-for-Performance Incentives
The federal government has supported a number of pay-for-performance demonstrations and appears to be committed to national implementation of this approach (Epstein, 2007). Not only can its proponents point to the experience of the United Kingdom with such a plan, but there is increasing evidence from the demonstrations that this may work here. However close this innovation may be to a tipping point, there is still concern that the level of hospital sector improvement may not be sufficient to warrant the investment (Epstein, 2007; Lindenauer et al., 2007).
Select Providers and Programs on the Basis of Quality Excellence
Insurers profile providers on the basis of quality, but the federal government has been reluctant to get involved unless fraud and abuse or specified adverse events are involved; however, the opportunity for greater selectivity is still there.
Quality of Care—Oligopolistic Competition
Encourage or Mandate Transparency of Quality Reporting in Federal Plans and Programs
On August 28, 2006, President Bush issued Executive Order 13410, entitled “Promoting Quality and Efficient Health Care in Federal Government Administered or Sponsored Health Care Programs.” U.S. Department of Health and Human Services Secretary Michael Leavitt interpreted the orders as promoting “value-driven health care.” In a letter addressed to employer CEOs, Secretary Leavitt (2006a) wrote, “I am writing to invite you to play a leadership role in the movement toward transparency and value-driven health care.” He asked for support of the “four cornerstones” of the Executive Order:
•Interoperable health information technology
•Transparency of quality
•Transparency of price
•Incentives for high-value health care.
Encourage Wider Use of Health Information Technology
The same executive order calls for government agencies to require in contracts and agreements that whenever a health care provider, health plan, or health insurance issuer “implements, acquires or upgrades health information technology systems, it shall utilize, where available, health information technology systems and products that meet recognized interoperability standards.” Interoperability is a cornerstone of any efforts to collect information on quality of care, costs, and outcomes for reporting to consumers.
Quality of Care—Free-Market Competition
Work Reporting of Quality Care and Adverse Events Into Purchasing Specifications for Federal Programs
Quality reporting for public consumption was also envisioned in Executive Order 13410 and by the “transparency” efforts of the Secretary Leavitt. Reporting of adverse events is required by JCAHO and is also subject to CMS scrutiny.
Oversee Licensure and Credentialing of Foreign-Trained Providers
Foreign medical graduates who are citizens or immigrants must now go through a series of hurdles to achieve licensure in the United States. These evaluation programs will have to continue to balance off the quality aspects of their credentialing process and yet avoid restricting the supply of providers. Given the fact that primary care residencies are not being filled by domestically trained graduates, the country will be relying heavily on outsiders for those services for some time to come.
Cost of Care—Administered System
Use Full Bargaining Power in Negotiation of Fees and Discounts
One bone of contention in the 2006 election was whether the federal government should use its full bargaining power in dealing with the pricing of prescription drugs under federal programs, especially Medicare Part D. Some government programs such as the Veterans Administration Health System bargain for and receive much lower prices than Medicare and Medicaid. Federal government policy about use of its monopsony buying power has been very mixed in terms of how strongly prices for federal programs are negotiated for purchases such as physician services, hospitals, home health, and pharmaceuticals. It would appear that the lobbying and political power of the affected providers have a lot to do with the intensity of bargaining.
Limit Eligibility and Covered Services in Entitlement and Categorical Programs
The federal government in addition to negotiating prices, also established what it will pay for by exercising its legislative and administrative powers. In the budget process, many changes get made in who and what gets covered in what program from year to year. Some of these changes are political, but some can be technologic as well. For example, the ESRD program has added alternatives such as outpatient dialysis centers, home dialysis, and transplantation to its original program of dialysis in hospitals. It has taken steps to encourage less expensive technology, including national support for organ donation and transportation.
Cost of Care—Oligopolistic Competition
Expand Managed-Care/Disease-Management Programs
Although the federal government began with and still maintains a fee-for-service philosophy for Medicare and Medicaid, it has encouraged states efforts to move more and more Medicaid recipients and dual eligibles (for both of the programs, mostly the disabled) into managed-care programs and adopt disease-management programs to control the costs of the 20% of the under 65 population who account for 80% of health care claims from that group. Medicare Part D, the prescription drug benefit, represented a major change for that fee-for-service program in that those who want the benefit must enroll in a Medicare prescription drug plan. Furthermore, many large HMOs are working to recruit Medicare patients by offering to waive the Part D premium, at least temporarily, if older persons also join their Medicare HMO. At the same time, the Medicare program is taxing the states for their share of the drug premiums for some seven million enrollees, most of whom are active patients whose drugs were previously covered by Medicaid. This tax is a called the clawback. In essence, the clawback makes the states partially responsible for funding Medicare. Several governors are resisting the clawback provision and court cases are pending. States have also been concerned about the drug benefit attracting more enrollees, sometimes called the woodwork effect, and about the potential loss of federal waivers that had allowed some states to receive matching federal funds for their existing pharmacy benefit programs.
Bundle Payments for Services
Porter and Teisberg (2006) have suggested that we need to move to a system in which the full cost of treating a disease entity is made fully transparent by bundling various necessary services into a single price. Although prospective reimbursement systems have accomplished some of this for insurers, including the federal government, they have not translated into transparency for the buying public. It is not clear whether the transparency approach outlined by Secretary Leavitt (2006b) will capture both physician and hospital and other provider costs into a single figure unless the providers are integrated into a single billing institution.
Subsidize Capacity Reductions
There are some areas and some services that are over capacity and therefore likely to have high costs and high prices and deliver unnecessary services. For example, on November 28, 2006, New York State’s Commission on Health Care Facilities in the 21st Century recommended closing 7% of the state’s hospital beds. This would involve closing nine hospitals and reconfiguring 48. The Commission operated under a law setting up a process similar to the federal government’s procedures for closing military bases. Its entire recommendation had the force of law unless the Legislature or the Governor turned down the proposal in its entirety by the end of the year. The state would receive $300 million per year for five years to defray the transition costs from the Federal-State Health Reform Partnership (Cooper & Chan, 2006).
Support Community-Wide Development of Health Information Networks
The National Health Information Network program outlined in Case 8-1 is an example of this policy approach. That case discusses some pros and cons of the current federal government approach.
Cost of Care—Free-Market Competition
Change Policy on Tax-Deductible Status of Employer-Paid Health Premiums and Individual Health Expenditures
President Bush’s 2007 State of the Union message proposed a number of changes in the tax code pertaining to the deductibility of employer-paid and individually paid health care premiums. These proposals would make individual premium payments fully deductible just like employer payments, but put a cap of $7,500 per individual or $15,000 per couple on the overall deductibility of premiums. As of 2006, individual health care premiums were included with other health care costs, which could be deducted only if they exceeded 7.5% of adjusted income. The cap would be new and would be designed to reduce the incentive to purchase policies that are deemed to encourage overutilization.
Support Individual Medical Savings Accounts
Market-oriented strategies for controlling costs have gone through a number of phases. In the 1980s and early 1990s, HMOs were encouraged and were temporarily successful in slowing down the rise in costs; however, as costs rose again, policy makers looked for an alternative approach. In the late 1990s, the concepts of consumer-centered care gained greater acceptance. More and more companies, faced with increased international competition and increasing inflation in their insurance premiums, felt a need to reduce or eliminate health care benefits. At the same time, there was greater acceptance of a philosophy of defined contribution pension plans rather than defined benefit plans. That made it easier to accept the similar transition for health insurance benefits. Because health care benefits are fully funded annually, the underlying drivers were not quite the same, but that paved the way conceptually for employers to pay a fixed amount regardless of the amount of cost inflation in health care.
There are two basic approaches to the limited-benefit approach. The older approach was to fund a basic plan with limited benefits and one or more premium plans with the employee responsible for paying the difference. This usually included the option of enrolling one’s family and purchasing additional services such as dental and long-term care insurance. The other approach is characterized by the health savings account, which allows the consumer to assume more of the risks of health care costs, but to keep the winnings if the gamble pays off.
Where the basic plan limits the employee to a preferred-provider panel, one enhanced alternative is a point-of-service plan in which the employee can go to any provider and pay the difference between the negotiated rate and the provider’s bill. This has been a popular option because American patients strongly value having the freedom to choose their own providers.
Recent federal legislation supports the second alternative, the consumerdriven health plans approach, which often includes the following elements:
1.The employer pays a fixed amount toward each employee’s health benefit.
2.It is paid into the employee’s tax-sheltered health account, which he or she controls and uses to pay for care (called a health savings account).
3.The money in that account that is not spent is allowed to accumulate from year to year.
4.The employee is also covered by a high-deductible health insurance policy that protects him or her from the worst effects of a catastrophic health event.
5.The employee receives online support for health maintenance activities, access to information on provider quality and cost histories, discount programs, and the status of his or her health care account.
Privatize Parts of Medicare, Medicaid, and Other Federal Programs
The George W. Bush administration had as one of its priorities to increase the private market approach to federal programs such as Medicaid (Texas Health and Human Services Commission, 2007). For example, private insurance companies were subsidized to undertake Medicare-and Medicaidmanaged care programs. There have been a number of pros and cons raised in the debates about this policy. These programs have been fee-for-service, and there had been only limited attempts to manage care; however, the government-administered programs had very low overhead costs, and those of the insurance companies have been considerably higher. The recent profit margins and executive compensation of many health care insurers have been rising rapidly.
Implement Information and Price Transparency in Federal Programs and Promote Parallel Industrial Efforts
The letter to employer CEOs from Secretary Leavitt is an illustration of this approach. His office has been providing packets of information to the private sector. Some of this material clearly outlines the administration’s vision for consumer-driven health care. In a brochure issued by the U.S. Department of Health and Human Services (Leavitt, 2006b), the Secretary envisioned the information that each purchaser of health care might need in order to support a major health care purchasing decision. This is reproduced as Figure 5-1. This compares five hospitals on distance, several quality-related variables, and a cost estimate for a hip replacement procedure.
Support Consumer Information Reporting and Database Availability
The combination of health information technology gathering data at the source and the reporting envisioned for individual health care purchasers will have to be based on the development of systems that aggregate data from the providers and present it as needed to the consumers. This will be an expensive proposition, and how it will be financed is uncertain.
FIGURE 5-1The Future

Source: M. O. Leavitt, Better Care, Lower Cost, DHHS, p. 6.
Constrain Anticompetitive Practices
The Federal Trade Commission has been active in overseeing hospital mergers and in stopping constraints on professional service advertising once deemed “unethical” by professional associations. The Food and Drug Administration also oversees the truthfulness of drug advertising claims, even those under a patent monopoly; however, much of the action to maintain or constrain the market in professional services is centered at the state level, as states make and enforce professional licensure requirements and oversee their local health insurance markets.
Insurers have tended to compete on premium levels because of payer and consumer sensitivity to those payments. They have taken a number of steps to control costs. The easy way to do this is to discourage utilization of services. Since the HMO concept became widely accepted in the 1970s, many national and state government efforts have attempted to offset the market power of dominant insurers and providers and to offset any tendency to rely on anticompetitive practices against both payers and providers.
Other Interventions
The federal government also undertakes programs that support health care effectiveness, but are not aligned with one political or economic point of view, including investments in medical research, professional education, and information technology. These tend to be individual legislative responses that fulfill generally accepted roles for government. The government at times also invests through public health education programs and screening programs. It may also choose to relax regulatory barriers that in effect reduce the investment requirements of providers, although the tendency has usually been toward more regulation, which requires more government investment and more matching efforts by providers and provider organizations. Government also may respond to crisis situations or special situations that arise and gain public support.
Supporting Research, Development, and Deployment
Health care is a service sector with few major players that have enough geographic coverage, and hence enough volume, to amortize the costs of a proprietary research program. Possible exceptions are large insurers, hospital chains, and HMOs. The industry is dependent therefore on vendors such as the pharmaceutical industry and equipment suppliers to conduct applied research and product development; however, they, in turn, tend to focus on high volume, patentable new technologies, often called blockbusters. Therefore, there are gaps that government research programs must address.
•Treatment methods: These are developed by private industry where patentable and by the government and universities. The U.S. government has maintained a number of world class research organizations in NIH and CDC. A newer player is AHRQ, which emphasizes research into treatments that are already in use. Much of the actual research is conducted by universities and think tanks, but the research strategy is often in the hands of the federal agencies.
•Delivery system methods: Increasingly, the government has become involved in managerial innovations pertaining to the quality and cost of health care. Examples include the National Health Information Network, where the government is also facilitating deployment, and the work of the Institute of Medicine on medical errors and subsequent research to reduce error rates.
Provider Quality and Availability
The issue of planning for the supply of health personnel has often been controversial. For example, there has been considerable political pulling and hauling about assuring residency places for U.S. citizens who are also foreign medical graduates. In many countries, the ministry of education decides how many professionals of what type will be trained, sometimes in collaboration with the ministry of health and sometimes without its input. In the United States, neither health care nor education is the responsibility of the central government, and thus, the planning is highly decentralized. Individual schools and institutions, influenced by federal, state, and local budgets and local staffing needs, decide how many persons to admit and graduate at each level. Professional associations control supply to some extent by the number of residency and training programs that they accredit, but they must be ever mindful of the possibility of antitrust actions when they try to cut back on the supply. Various nonprofit associations (boards) controlled by the professions handle postgraduate training, testing, and certification; however, the federal government plays a major role by offering grants that support training in shortage areas such as nursing and pharmacy and loan forgiveness to graduates who agree to work in underserved areas.
Health and Safety Regulation
The Food and Drug Administration is involved in many regulatory programs aimed at protecting the health and safety of the public, including drug and medical device approval, drug advertising, clinical laboratory standards and inspections, drug biologics manufacturing safety, and a host of other programs. The National Institutes of Health policy governs the use and maintenance of laboratory animals. Federal policy also supports a number of voluntary regulatory efforts such as JCAHO and various professional societies by requiring certification as a condition for payments from federal programs.
Special Situations and Opportunities
The federal government intervenes in special situations such as hurricanes by picking up the state and local shares of program funding and offering tax and investment incentives. It is also sensitive to some high-visibility public health concerns such as potential pandemics, developing and stockpiling vaccines and treatment supplies. Where the federal government sees an opportunity, such as community funding of access for the uninsured, it can allow allocation of budgeted funds to encourage experimentation and evaluation.
STATE AND LOCAL GOVERNMENT OPTIONS
In fiscal-year 2004, Medicaid spending surpassed education as the largest item in state general funds budgets (SCI, 2006, p. 28). The states have proven to be 50 distinct laboratories for developing health policy initiatives designed to increase access to care, especially for children and the uninsured. States are continuously making tradeoffs among programs and funding sources. Local governments, with encouragement from Washington, are also adding programs to ameliorate the problems of the uninsured, despite their limited and rather inflexible tax bases. Often they participate as partners with state government, Medicaid, employers and insurers. A somewhat typical model is the 2005 three-share access program of Muskegon County, MI for low-income uninsured workers (less than $11.50 per hour) not eligible for existing public programs. The employer pays about a third of the premium, and the worker and the community pay similar amounts. Local government funding comes from federal programs, and care must be delivered locally.
Table 5-3 provides a list of current and proposed state and local government policy initiatives. Again, this is not intended to be exhaustive, as many of the federal government options in Table 5-1 also can be and are being implemented at these levels.
TABLE 5-3Illustrations of State and Local Government Health Policy Options
Access to Care
•Administered system
•Universal coverage using general revenues
•Expanded/reduced eligibility and benefits
•Mandated coverages and services
•Captive providers (e.g., health department clinics)
•Increase funding to enable full enrollment of eligible populations
•Oligopolistic competition
•Mandate employer participation/play-or-pay
•Impose special taxes on providers and insurers to subsidize low-income uninsured
•Increase primary care provider supply
•Support pooled insurance risks
•Support cooperative buying arrangements for smaller businesses
•Make reinsurance more widely available
•Free-market competition
•Individual mandate for health insurance
•Reallocate federal and state funds and blend with others sources to subsidize universal or near-universal coverage
•Modify medical practice constraints
Quality of Care
•Administered system
•Require participation in quality improvement programs
•Encourage “medical home,” especially for special needs enrollees
•Use pay-for-performance approach
•Mandate installation and use of health information technology
•Train providers in evidence-based practices
•Oligopolistic competition
•Support regional consumer information reporting and databases
•Adopt pay-for-performance in private as well as public sector
•Support interoperability and transferability of personal health records
•Free-market competition
•Support reporting of quality outcomes and quality survey data
•Support training of providers in evidence-based practices
Cost of Care
•Administered system
•Malpractice (tort law) reform
•Negotiate program fees and discounts
•Require disease management for special populations
•Reduce/enhance provider payments
•Oligopolistic competition
•Facilitate “Connector” system to enable access to more than one insurer’s plans and full portability
•Modify medical practice laws and constraints
•Encourage managed care and disease management
•Encourage licensure and credentialing of new providers
•Use certificate-of-need procedures
•Enforce antitrust laws and regulations
•Free-market competition
•Remove insurance barriers to medical tourism
•Remove constraints on insurance products to attempt to bring free-riders into the system
Other Interventions
•Research and development (e.g., embryonic stem cell research)
•Policy analysis advice to legislative processes
•Education of professionals
•Distribution of professionals and services
•Public health functions and departments
Access to Care—Administered System
Universal Coverage Using Tax Revenues
State governments can attempt to provide universal coverage. States are unlikely to go much further than to reallocate existing federal and state health care funds without further taxation because they have greater financial constraints than the federal government. They cannot print money. Massachusetts has been considering the following amendment to its state constitution:
Upon ratification of this amendment and thereafter, it shall be the obligation and duty of the Legislature and executive officials, on behalf of the Commonwealth, to enact and implement such laws, subject to approval by the voters at a statewide election, as will ensure that no Massachusetts resident lacks comprehensive, affordable, and equitably financed health insurance coverage for all medically necessary preventive, acute and chronic health care and mental health care services, prescription drugs and devices.
In the meantime, the Governor and the Legislature have agreed on a program intended to cover over 95% of the population by requiring most citizens to carry health insurance or pay into a pool through the state income tax system. The new approach also required employers to pay $295 per year per uncovered employee (play-or-pay). Governor Romney used his line-item veto to try to strike that provision from the law, but that veto was overriden.
Maine’s Dirigo health plan intends to cover most of the state’s uninsured individuals by 2009. It will be financed through savings from a series of related cost cutting moves and will provide sliding scale subsidies to low-income families.
Expanded/Reduced Eligibility and Benefits
Just as federal agencies can modify eligibility and benefits in their programs, state and local governments can do so in the programs that they fund. They also can apply for Medicaid waivers to reallocate resources in that program toward high-priority needs.
Mandated Coverages and Services
Hawaii has come the closest to achieving universal coverage by requiring all employers except for those employing seasonal agricultural workers to provide a minimum level of group health coverage and pay at least half the premium for all workers working 20 or more hours per week after 4 weeks of employment. Its laws also specify how to meet the needs of children, the disabled, and pregnant women. Other states are not likely to follow suit because the Hawaii plan required a congressional amendment to the ERISA law, and this is unlikely to be repeated. In March 2005, Tennessee ended coverage of some 320,000 adults enrolled in the TennCare program. Coverage for some 119,000 children continued. State and local governments can also determine what services are covered in the programs that they administer for their employees and client publics.
Captive Providers (e.g., Health Department Clinics)
A number of states and municipalities provide primary care services directly through their public health system. Many counties and municipalities also own their own local hospitals, many of which were built with federal government subsidies through the Hill-Burton legislation. Academic medical centers owned by state universities also have their own hospitals and faculty practice plans, often with some expectation of serving the state’s population as well as training health personnel. State mental hospitals and other institutions for the disabled are usually the states’ largest direct expenditures on health services after Medicaid.
State and local health departments and hospitals can be a source of free care for those without insurance. For example, this was proposed by Mayor Newsome of San Francisco. Often this is seen as a cost reduction measure that keeps patients from getting sicker and presenting themselves in emergency rooms where care is more expensive.
Increase Funding to Enable Full Enrollment of Eligible Populations
A number of existing programs are not fully funded by the states, and thus, some eligible children and adults cannot receive the services intended for them. Governments at all levels could appropriate sufficient monies to cover all eligible individuals and their needs under their programs.
Access to Care—Oligopolistic System
Mandate Employer Participation/Play-or-Pay
Some states have been experimenting with mandates on employers, usually the large-and medium-sized ones, to provide health insurance. Where employers choose not to pay insurance premiums, they are required to pay a set amount per employee per month to a pool that would cover health insurance purchases for their employees. These payments are seldom sufficient to cover the full premium, and thus, additional funding sources are usually needed. This “play-or-pay” requirement may be of questionable legality if imposed on self-insured firms exempted under ERISA.
Impose Special Taxes on Providers and Insurers to Subsidize Low-Income Uninsured
The initial proposal for California from Governor Schwarznegger included a 4% payroll tax that would go into a state insurance fund. Doctors and hospitals would pay 2% to 4% of their revenues into that fund to subsidize insurance for low-income individuals and increase Medicaid payments to physicians (Fuhrmans, 2007a).
Increase Primary Care Provider Supply
Many states have offices that are trying to expand primary health care services in rural areas. These often work in collaboration with the National Health Service Corps in setting up clinical services in those areas. States may also mandate coverage for alternative and complementary health services. Most every state requires the inclusion of chiropractors as providers. In the state of Washington, all health insurance programs except the self-insured must cover acupuncture.
State educational systems also play a major role in determining the supply of medical providers. When there is a shortage of professionals, state educational institutions are quick to expand their programs; however, it is much harder to get them to cut back when there appears to be an oversupply.
Support Pooled Insurance Risks
Most of us are familiar with risk pools in auto insurance where drivers with poor claims records are assigned to a risk pool and each insurance company operating in the state must take a proportionate share of those in the pool as an assigned risk at an assigned rate. The same can be done with high-risk patients, forcing the companies that want the lucrative business in a state to take a certain proportion of the chronically ill from specific categories in order to participate. That reduces the likelihood that those sicker patients will be excluded by the insurance underwriting process. In 2005, some – 31 states had pooled-risk programs.
One frequently debated option is community rating, in which the whole community is a single pool and the insurer cannot profit by excluding sicker citizens or pricing them out of the market; however, the insurance industry has strongly resisted this concept as unfair to those who take care of their health. Risk pools are therefore used as a compromise to overcome some of the inequities of the underwriting process.
States can use their powers to regulate insurance to encourage plans that pool health insurance risks. There are three ways that this can be encouraged:
•Barring discrimination through underwriting against high risk individuals under existing employer programs
•Establishing special pools of high-risk enrollees, a portion of which must be accepted by the insurance companies who want to participate in the state’s markets at a special rate (perhaps with a subsidy from the state)
•Cross-subsidizing the high-risk enrollees through a special tax on all health care premiums that is used to offset their higher premiums
Support Cooperative Buying Arrangements for Small Employers
Montana and Arizona have developed buying cooperatives for small businesses seeking to provide coverage for their employees. State or local governments may or may not choose to pay part of the premium costs for those participating in their buying pools.
Make Reinsurance More Widely Available
An alternative to or a supplement to risk pools is a reinsurance program. Under that program, the risk of catastrophic cases would be borne by a master policy with other insurers or by a state-financed entity. In New York, the state has offered a reinsurance program since 2001, thereby allowing catastrophic coverage for sole proprietors, small firms, and low-income workers at more reasonable rates. Federal reinsurance legislation has also been introduced in Congress. This could address the problem of adverse section and help bring younger, healthier individuals back into the health insurance market.
Access to Care—Free-Market Competition
Modifying Medical Practice Constraints
Delivery of health care is tightly constrained in the United States by any number of laws and regulations governing medical practice. They cover both individuals and institutions. State medical practice acts and reimbursement policies can have a profound impact on the supply of potential providers. As noted in Chapter 2, there are many possible substitute workers to do specific tasks or pieces of tasks done by existing professionals: psychiatrists for psychologists, nurse practitioners and physician assistants for primary care and emergency room physicians, nurse midwives for obstetricians, nurse anesthetists for anesthesiologists, dental hygienists for dentists, pharmacy technicians for pharmacists, and so forth. State governments can step in and expand the roles allowed to the substituting professions, increasing the supply of services and potentially reducing the costs of care.
Quality of Care—Administered System
Encourage “Medical Home” for Special Needs Enrollees
The American Academy of Pediatrics (2007) has advocated that categorical plans and Medicaid plans require that each covered child with special needs have a medical home, a designated provider who would provide continuity of care, know the family and child situation, work with the family, coordinate community-based services, and follow up on the case in a timely manner. Some states are working to expand this concept beyond children.
Use Pay-for-Performance Approach in State-Purchased Plans
Each state and local government is a major regional purchaser of health care, including Medicaid and coverage for state employees and retirees and their families; therefore, these governments can insist that pay-for-performance systems be included in their purchase specifications and care contracts.
Mandate Installation and Use of Health Information Technology
State and local governments can likewise use their buying power to require the expansion and use of health information technology with their clients, including computerized physician electronic order entry and electronic medical records. They can also support economically the development of community health information networks.
Train Providers in Evidence-Based Practices
State programs can also undertake to train providers on the nature of and motivate the use of evidence-based practices. Case 12-1 presents one such effort, supported with federal funds to implement evidence-based practices in the North Carolina mental health system. State continuing-education programs for providers, such as the Area Health Education Center programs, can also participate in such educational efforts, providing courses and academic detailing.
Quality of Care—Oligopolistic System
Support Regional Consumer Information Reporting and Databases
Many states now have their own quality data reporting requirements for hospitals similar to NCQA and JCAHO requirements. Because these inspectors are voluntary organizations representing the interests of employers, insurers, and hospitals, state programs would assure that the data on costs and outcomes are available to the general public.
Adopt Pay-for-Performance in Private as Well as Public Sector
Federal and state programs can publicize the effects of pay-for-performance plans in public pronouncements and can demand it from insurers and providers who service their employees and their dependents. This will quickly build a critical mass of activity that will pervade both private and public programs.
Support Interoperability and Transferability of Personal Health Records
Similarly, state and local governments can encourage the development of local health information networks by including such requirements in contracts for their employees and dependents, knowing that the system, once in place will be used by all parties.
Quality of Care—Free-Market System
Support Reporting of Quality Outcomes and Quality Survey Data
State and local governments can demand quality transparency for their employee and dependents programs and through funding of surveys and database systems for public use.
Support Training of Providers in Evidence-Based Practices
State institutions provide much of the training of providers through universities and continuing education systems. In overseeing and funding such programs, states can have considerable impact on the pace of adoption of evidence-based practices through continuing education courses and academic detailing.
Cost of Care—Administered System
Malpractice (Tort Law) Reform
There is a high level of dissatisfaction in the health care industry with the costs of malpractice cases and resulting premiums for malpractice insurance. A number of states have intervened to set health care apart from their usual tort law procedures and remedies. Various remedies have been proposed and many experimented with by states.
Tort law reform usually refers to legislation limiting (capping) the size of malpractice awards caused by negligence, especially the components awarded for pain and suffering and as penalties for gross negligence, and/or limiting the contingent fees paid to lawyers who win such cases. Because the cost of malpractice suits and insurance is much higher in the United States than any other country and legal fees and court costs consume close to half of the awards, a number of alternatives have been proposed, including the following:
•No-fault malpractice insurance similar to that used in some states for auto insurance
•Mandatory arbitration or mediation
•Institutional (enterprise) liability on a no-fault basis.
All of these would bypass the system of jury trials currently used to prove or disprove negligence and assume that juries and plaintiffs lawyers are responsible for the size of the awards. Proponents of enterprise liability believe that after an organization sees negligence cases as costing it directly, it will act to reduce such errors in ways that the professions have so far been unwilling or unable to adopt.
Negotiate Program Fees and Discounts
In some cases, payers may ask for bids from various providers and then select a small number who offer the lowest prices, or more often, the deepest discounts off published prices. There may also be other restrictions in the bidding process that limit the availability of suppliers, such as 24/7 services, access to hospital beds, financial strength, number of years in business, and special certification or licensure requirements.
State and local governments also can enlist suppliers and especially regulated insurers into any number of possible cost-sharing or premium-supplementing arrangements. For example, the governor of Pennsylvania negotiated a deal in 2005 with the state’s four nonprofit Blue Cross insurers to contribute 1.6% of their premium revenue over six years and 1% of their Medicare and Medicaid premiums (close to a billion dollars) from retained earnings to a state fund that would pay for coverage for low-income and uninsured individuals.
Require Disease Management for Special Populations
States have adopted a wide variety of strategies for inducing their enrollees to join HMOs and accept disease-management alternatives. They have mandated these approaches in some cases and offered a number of inducements for those who elect to accept that type of coverage.
Reduce/Enhance Provider Payments
For a number of years, just about every state has been reducing or freezing payments to providers under their Medicaid programs. Despite inflation, a growing caseload and improved access have increased the costs to the states by a rate of almost 9% annually. A significant proportion of the community-based provider population does not take Medicaid patients. States also adjust payments upward where there is a shortage of providers. An example is increasing the compensation of obstetricians where increasing the availability of prenatal care is likely to offset major preventable costs later.
Cost of Care—Oligopolistic System
Facilitate the “Connector” System to Enable Access to More Than One Insurer’s Plans and Full Portability
One innovation of the Massachusetts legislation to achieve near-universal coverage was the “Connector.” This has attracted a great deal of attention. There has been some confusion because there are two components under that label. One is the Connector Authority, which negotiates with insurers for basic policies for the uninsured and sets the level of subsidy that the state will contribute for those between the Medicaid upper limit and 300% of the national poverty level. The other is the “Connector,” which allows individuals to compare prices and coverages of all the participating insurers to determine which plan best meets their individual needs. These individuals would include the working poor and those with higher incomes whose employers do not offer insurance. This would enable them to meet the individual mandate for health insurance required under law in Massachusetts (Texas Health and Human Services Commission, 2007).
Those who favor the demise of employment-based health insurance see this as a facilitating step for a competitive individual marketplace. There is concern that some states will use the concept to replace public coverage of those under Medicaid or the State Children’s Health Insurance Program with vouchers (Solomon, 2007). How this will play out is uncertain. Initial insurer bids were considerably higher than Massachusetts plan designers had anticipated and tradeoffs in coverage have been necessary.
Modify Medical Practice Laws and Constraints, as Necessary, to Encourage Licensing And Credentialing of New Providers
Most professionals are licensed by state boards, whereas most specialists are certified by national professional boards. All of these represent an opportunity for restricting entry. The Federal Trade Commission has been very much aware of this issue and has moved decisively against professional rules against advertising enforced by the professions. Any attempt to introduce a new type of provider who will perform a limited range of services at lower cost has usually been resisted by the entrenched professions. In general, legislatures have had to intervene, citing the needs of underserved areas or populations. Examples include nurse practitioners, physician assistants, and surgicenters.
Encourage Managed Care and Disease Management
The Texas Medicaid program reported that it was moving from 40% of its population under managed care toward a target of 72% in 2008. It had implemented disease managed care programs for the rest of its population targeting a number of chronic diseases. It also had implemented a preferred drug list program for Medicaid requiring a supplemental rebate or special proposal for negotiation (Texas Health and Human Services Commission, 2007).
Use Certificate-of-Need Procedures
Certificate-of-need legislation requires providers to obtain state approval of additional major capital investments in items such as imaging equipment and additional bed capacity if they are to receive reimbursement. It is an attempt to mediate arms races among provider institutions; however, it is often a highly political process that has often lacked effectiveness, and it is opposed by those who argue that it stifles competition by limiting entry into the field and can be used to stop expansion to meet demand by successful competitors (Havighurst, 2005).
Enforce Antitrust Laws and Regulations
States have their own antitrust laws and regulations that can be applied to mergers of organizations such as hospitals. States can also outlaw anticompetitive practices, which include the following:
•Attempts of licensing boards and professional societies to limit new entrants
•Colluding to set prices for services.
State antitrust laws can also be used to overcome too much concentration in specific markets, although many major health care markets are clearly multistate, especially those involving complex or specialized referrals.
Cost of Care—Free-Market System
Strengthen Antitrust Laws and Regulations
States do also legislate against specific anticompetitive practices. For example, Pennsylvania law duplicates and supplements a number of the anti-kickback and Stark amendments provisions. One section prohibits hospitals from renting clinic or office space to physicians below market, and others require disclosure to patients that their doctor has an economic interest in the facility to which they are being referred and that they are informed of their rights to choose an alternative facility.
Many HMOs require their providers to be board certified. This is a marketing decision that adds another constraint to their local supply of providers. Professional organizations must also approve residency programs in their specialties, thereby exerting some control nationally over the quantity and quality of services available. Large HMO organizations may become dominant in a region and limit the options for other would-be providers.
To offset some of these possible anticompetitive effects, states have countered with antitrust actions and with any willing provider legislation. Such legislation often addresses two issues, namely (1) restrictions on the panel of providers that a patient can access within a profession and (2) restrictions across professions as to who can be compensated for a service. Under such a law, for example, if one has acute low-back pain, the insurer cannot limit the individuals to seeing a small number of pain experts and clinics, and it cannot limit payment to primary care physicians and orthopedic specialists. It may also be required to include coverage for chiropractors and acupuncturists. Such laws are considered by some to be a hindrance to institutional cost control efforts.
Remove Insurance Barriers to Medical Tourism
The primary barrier to medical tourism, individuals leaving the country to seek nonemergency health care at much lower costs plus tourism inducements, is the fact that it has not been covered by one’s health insurance contract. Mattoo and Rathindran (2006) suggested that failure to do so is due to the oligopoly nature of the private health insurance industry. These companies operate under the regulatory umbrella of state insurance commissioners. They argue that patients can and do move, making health care an item of international trade, and that quality need not be a problem with certifications available through the Joint Commission International and the U.S. Medical Licensing Examination. They point out that 25% of U.S. physicians, including 20% of medical school faculty, and 14% of U.S. nurses were trained abroad and that modern, well-equipped facilities are available.
They and Altman et al. (2006) provided data showing savings of 40% to 65% and more, even after travel and lodging costs, for procedures such as hip and knee replacements, cardiac and gall bladder surgery, hysterectomy, and rhinoplasty. Foreign providers are increasing represented by sales organizations in the United States that are negotiating contracts directly with self-insured employers to add foreign doctors and hospitals to their provider network. The West Virginia legislature has been considering the possibility of making this an option for its state employees and their dependents.
Other Interventions
Research and Development
Health care research and development have usually been an activity of the federal government; however, when the policies of the George W. Bush administration restricted embryonic stem cell research, California acted to set up its own funding and other states have indicated a willingness to follow suit.
Capital Investment
Although most states do not fund health care facility construction and renovation directly, many have authority to issue special purpose bonds on behalf of the state’s nonprofit health care institutions. The objective of these agencies is to reduce the funding costs for each borrower by going to the market in larger amounts with a broader risk pool. In most cases, institutions receive lower rates when the states back the securities.
Education of Professionals
State-owned technical schools, colleges, and universities are major suppliers of health personnel. They are often sensitive to the personnel needs perceived by legislatures and local institutions. States frequently have offices and programs that recruit and support services in rural areas. Area Health Education Center programs are an example of an extensive support system for dispersed personnel. They provide both training and specialized services to areas of need.
Public Health Functions and Departments
States also administer the traditional public health system in conjunction with local government units. Sometimes these offer primary care to the indigent. Virtually all jurisdictions provide the basic public health services of maternal and child health clinics, infectious disease control, health education, sanitary inspections, and environmental health and safety inspections. Ten essential public health services are frequently cited. They are outlined in Table 5-4.
TABLE 5-4 Essential Public Health Services
1. Monitor health status to identify community problems.
2. Diagnose and investigate health problems and health hazards in the community.
3. Inform, educate, and empower people about health problems.
4. Mobilize community partnerships to identify and solve community problems.
5. Develop plans and policies that support individual and community health efforts.
6. Enforce laws and regulations that protect health and ensure safety.
7. Link people to needed personal health services and ensure provision of care.
8. Ensure a competent public and personal health care workforce.
9. Evaluate the effectiveness, accessibility, and quality of personal and population-based health care.
10. Research for new insights and innovative solutions to health problems.
Source: McLaughlin & Kaluzny, Continuous Quality Improvement, 3rd Ed., pp. 361–362. Jones and Bartlett, 2006.
CONCLUSION
The U.S. market for health care is very much influenced by governments in their roles as payers, insurers, employers, regulators, and providers of last resort. Much of the public debate is over the current trend toward more reliance on the marketplace. Whatever the ideology adopted, governments must deal with the following concerns:
• Information asymmetry coupled with product complexity
• The conflicting roles of providers as agents for both patients and others
• The tendency of market systems to maximize consumption.
Thus we see governments adopting a confusing and seemingly inconsistent array of measures designed to deal with these concerns at every level of government. For example, resources go out to enhance access to services, expanding the supply of providers and technology at the same time that other programs seek to constrain consumption. No wonder professionals caught up in this maelstrom sometimes appear discouraged and sullen. Still most professionals persevere and reap the intellectual and personal rewards of their craft. They continue to balance the interests of their patients and their organizations successfully.
All of this reflects the Chinese curse: “May you live in interesting times.”
Case 5–1SPECIALTY HOSPITALS AND COMMUNITY HOSPITALS
BACKGROUND
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 included an 18-month moratorium on payments to specialty hospitals (cardiac, orthopedic, and surgical) that were not operating or under development by November 2003 and in which physicians had an ownership or investment interest. This moratorium expired in June 2005. The CMS effectively extended the moratorium by continuing to review its criteria for approving or starting to pay new specialty hospitals.
Specialty hospitals have been around for a long time—children’s hospitals, rehabilitation hospitals, psychiatric hospitals, eye and ear hospitals, and cancer hospitals. The Omnibus Budget Reconciliation Act of 1989 included a provision against payment for physician referrals to facilities in which they had an economic interest, but specifically exempted ambulatory surgery centers and “whole” hospitals. Thus far, specialty hospitals have qualified as whole hospitals.
A specialty hospital is defined as an inpatient hospital in which at least two thirds of the claims are in one or two major diagnostic categories or diagnosis-related groups (DRGs). In February 2003, 110 hospitals met these criteria. Of those, 92 were cardiac, orthopedic, surgical, or women’s hospitals. They had tripled in number between 1990 and 2003 and were concentrated in states without certificate of need (CON) legislation. Seventy-four percent were for-profit hospitals and on average were 50 percent physician-owned. Seventy percent had some physician ownership. Their growth and that of the ambulatory surgery centers were in part attributed to the substitution of DRG-based reimbursement for fee-for-service payment in the late 1980s. DRGs are not finely calibrated to reflect the actual costs of different kinds of cases that would fall within the same grouping.
Has there been a difference between the older group of specialty hospitals and the new ones? The older ones tended to operate as nonprofits that supplemented the existing facilities in the community. The newer ones tend to be for-profit, physician owned and to duplicate the facilities and services already supplied by community hospitals. It can be argued that when community hospitals perform the kinds of profitable procedures that are attractive to for-profit specialty hospitals, they use the profits to cross-subsidize other community services (Altman et al., 2006). Vladeck (2006) suggested that they subsidize the following:
•Health professions education
•Losses in special departments (burn centers, trauma centers, neonatal intensive care units, and AIDS clinics)
•Standby (emergency and surge capacity) costs
•Uncompensated care
•Other community services.
These services accounted for 16% to 18% of a community hospital’s budget. Some states compensate hospitals for some of these services. For example, New York compensates 8.95% for health professions education.
Specialty hospitals can be very attractive to physicians. They are drawn to these focused factories by the following:
•Their control over scheduling, staffing, admission, discharge, and so forth
•Added profits from ancillary services and technical component revenues
•Profits from case mix within DRGs
•Selection of the patients and their payer mix
•Reduced “on-call” responsibilities
•Avoiding participation in hospital governance and other mandated activities.
They do have to pay for additional capital facilities and equipment that would normally be supplied by the community hospital; however, the variety and scale of these investments are considerably reduced by the narrow range of services provided.
Community hospital advocates point to the fact that physicians may select only those patients with adequate insurance, can “cherry pick” the healthier patients, avoid emergency department duties, and avoid surveillance under some quality improvement and utilization review programs.
Community hospitals have responded by (Greenwald et al., 2006):
•Prohibiting physicians with a competing ownership interest from participating in governance
•Buying up the potentially referring primary care practices
•Signing exclusive service contracts with insurers
•Providing other resources, such as office space, to their competitors
•Offering inpatient specialist “management” subcontracts to offset ownership
•Advertising their own “centers of excellence”
•Making economic credentialing decisions that penalize competing physicians.
The legal status of these measures under federal and state anticompetitive statutes is likely to be in litigation for quite some time.
Results of Studies
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 required the Medicare Payment Advisory Commission (MedPAC) and the U.S. Department of Health and Human Services to study a number of related issues during the moratorium period. The MedPAC’s report (Guterman, 2006; Stensland & Winter, 2006) concluded that physicians were responding to incentives built into the DRG payment rates. These incentives resulted from the wide variation in the relative costliness of cases. Cardiac hospitals seemed to treat more of the profitable cases than community hospitals. Orthopedic hospitals seemed to treat more complex cases, but in healthier patients than community hospitals. No conclusions were reached about the surgical hospitals. Patient satisfaction also seemed higher in the specialty settings.
The study also concluded that the specialty hospitals delivered less uncompensated care, but that this was offset by the payment of property and corporate income taxes and by not receiving disproportion share hospital payments. The U.S. Department of Health and Human Services study (Greenwald et al., 2006) reached similar conclusions and observed that physicians did refer to hospitals they owned, but often continued to take emergency department calls to maintain their referral base. The studies did not identify much differential impact on either quality or utilization. Their recommendation was to modify the DRG prices to reflect costs more closely and to remove the incentives they provided.
CMS Decisions
CMS ended the moratorium in August 2006 and proposed to follow the MedPAC’s recommendations to revise the DRG payments so that they would be closer to hospital costs than hospital charges. It also proposed a rule that specialty hospitals would have to accept patient transfers under the Emergency Medical Treatment and Labor Act. At oversight hearings before the Senate Finance Committee, this decision was questioned sharply by ranking Senators Chuck Grassley (R-Iowa) and Max Baucus (D-Montana), who noted the negative impact on community hospitals and the apparent conflict with the intent of existing self-referral prohibitions.
The Various Points of View
The prologue to a series of articles on these issues in the January-February 2006 issue of Health Affairs (25:94) noted that:
In the larger context, though, the issues are not so simple. A decade ago, “market-driven reform” meant competition between integrated delivery organizations whose incentives for quality and efficiency derived from the capitated payments they received. Specialty competition and price transparency are fee-for-service strategies that exacerbate the distress of multi-specialty groups that thrived under capitation and were the darlings of the policy community a decade ago.
The proponents of three economic system views have sought support in press releases, testimony, lobbying, and the published literature. All three sides used parts of the U.S. Department of Health and Human Services and MedPAC studies to support their positions.
Oligopolistic Competition
On May 30, 2006, the American Hospital Association supported the senators for continuing “to stand up for the needs of patients and the community hospitals that take care of them.” Berenson et al. (2006) suggested that the specialty hospital movement and parallel physician efforts to control service lines within community hospitals may signal the restoration of the types of hospital–physician relationships that preceded managed care.
Administered System
Choudhry et al. (2005) wrote about the role of law in this situation and recommended that the issue be controlled by CON determinations to avoid duplication of resources and increased utilization. Altman et al. (2006) seemed to support the administered approach by asking, “Could U.S. Hospitals Go the Way of U.S. Airlines?” They argue that specialized competition, coupled with price transparency and consumer price sensitivity, would result in community hospital downsizing, reduced community services, reduced staffing levels, and reduced salaries.
Free-Market Competition
The American Association of Orthopedic Surgeons’ December 2005 “Position Statement on Specialty Hospitals” urged the repeal of all CON laws to foster “healthy competition.” Their statement also attributed that position to the Federal Trade Commission and the Department of Justice. Havighurst’s (2005) commentary on Choudhry et al. (2005) took a strong position that CON inappropriately supported the oligopoly position of the community hospitals. In January 2006, the American Medical Association president-elect issued a statement continuing its strong support of specialty hospitals (Champlin, 2006). Porter and Teisberg (2006) also argued against the CON approach because it supported local monopolies, but acknowledged the risks associated with physician ownership and self-referral.
CHAPTER 6Alternative Responses and Initiatives of Institutions and Professions
Tardiness or refusal to pay what doctors consider legitimate medical claims may add as much as 15% to 20% in overhead costs for physicians, forcing them to pursue these claims or pass along the costs to patients, according to Jack Lewin, a family doctor who is chief executive of the California Medical Association, a professional group of 35,000 physicians (Freudenheim, 2006b, p. 1).
Nongovernmental health care organizations operate in a market system, albeit an imperfect and sometimes highly regulated one. They provide most medical services and handle the financing of much of the system. For-profit and not-for-profit institutions operate side by side, often competing for the same business from employers, insurers, governments, and other professionals.
It is useful to identify the strategies that these actors adopt in response to governmental programs and initiate on their own to influence health policy. We again start with a table outlining the actors and the alternatives for responding to government actions and the marketplace (Table 6-1). Where alternatives have been addressed and terms defined in earlier chapters, we try not to repeat all of that information again. Then we look at some recommended policy alternatives that potentially affect all the players.
TABLE 6-1Responses and Initiatives of Institutions and Professions
Common Approaches
• Public relations
• Marketing and education
• Lobbying
Payers
• Employers
• Eligibility
• Subsidy offered
• Plans offered
• Relationship with insurers/self-insurance
• Worker education and training
• Insurers
• Method of organization
• Method of payment
• Plans offered
• Case management/carve-outs
• Utilization constraints
• Consumer education
Providers
Professionals
• Organization of practice
• Services offered
• Incentives
• Pricing
• Patient relationship
• Primary versus specialty care
• Efficiency
Institutions
• Organizational structure
• Scope and scale of services
• Pricing/discounts
• Efficiency
• Quality improvement
• Consumer information
• Credentialing decisions
• Involving payers in change processes
Professions
• Quality improvement
• Provider education
• Consumer education
Consumers
• Plan selection
• Provider selection
• Self-help
COMMON RESPONSES
All of the players listed in the Table 6-1 employ strategies to influence the marketplace and its regulators. These can be classified into three main types of interventions:
• Public relations
• Marketing and education
• Lobbying.
Each player manages its relationships with the media and with politicians and regulators directly, and each acts indirectly through trade associations and professional groups. You will see illustrations of this throughout the cases included in this book and in subsequent chapters dealing with political feasibility and values. The focus among these three interventions changes depending on the nature of the specific market. Lobbying is particularly intense in administered markets such as Medicare and Medicaid, especially when policy changes, such as new legislation affecting one’s interests, are under consideration. Public relations and education (sometimes referred to as social marketing) are used more assertively when regulators are considering changes, and marketing, especially advertising, is most intense where the market is less regulated. The term education can apply to the many different types of efforts to influence behavior. Government antismoking campaigns can be characterized as education, for example, but the term can also be used as one of the rationales behind highly commercial interventions like direct-to-consumer advertising of prescription drugs.
PAYERS
Customarily, the term payers refers to the financial entities, usually insurers, who pay the bills; however, they are only intermediaries for the true payers, those who sign the contracts for care, who are usually employers and the government. In an increasing number of cases, insurers cover individuals who purchase their policies directly.
Employers
Employment-based health care benefits have changed markedly since the 1950s. At first, employers were very passive about whether their unions took collective bargaining settlements as wages or as benefits and how those benefits were distributed. All that they cared about was the immediate cost per hour of the total contract agreement. Health care costs were low, and the workforce was young; however, these defined benefit packages took on a life of their own as costs in both pensions and health care began to rise much faster than prices or productivity. Now employers have to deal with both these rising costs and the reactions of employees, retirees, and the public when they reduce benefits. A number of U.S. steel and airline companies, for example, have gone through Chapter 11 bankruptcy proceedings to free themselves of these “legacy” liabilities for their employees, even the unionized ones.
Employers compete for the best workers, especially the highly skilled ones, in every labor market. They want their health benefits for workers and their families to be in line with competing employers. If benefits are too low, better employees will go elsewhere. If they are too high, the employer will attract those with high health care costs or health risks in their families (adverse selection) and become saddled with higher costs than their competition.
Eligibility
Employers can decide who gets health care benefits and when they start. New employees usually have a waiting period before they are eligible for health care benefits. Full coverage is typically limited to full-time, directly employed individuals and their families. This is one reason why contract employment and outsourcing have become so attractive. Contracting relieves the employer of the direct expense of health care and pension benefits, although some of those costs are probably reflected in higher wages paid to skilled contract employees and in the bids from prospective domestic suppliers.
Subsidy Offered
The proportion of employees’ health insurance that the employer pays is fixed by contract in unionized settings and by company policy elsewhere. The employer negotiates for an array of plans, marketing them to employees, collecting premiums, and funding much of the cost of the basic plan. More recently, employers have moved toward promising a defined contribution (a fixed dollar amount). Coverage for dependents is usually much cheaper under the employer’s plan than anything available independently. This is due to the purchasing power of the group and the reduced costs to the insurer of marketing and administering the plan. Employers may also offer additional health insurance products not normally included in health insurance, such as dental insurance, long-term care insurance, and eye care insurance. Here they most likely do not subsidize the care, but pass along the advantages of group purchasing.
Many employers offer new employees plans that do not exclude preexisting conditions, offering coverage not usually available on the open market. Some employers, however, do require a pre-employment physical. Under the Americans with Disabilities Act, the use of this information must be limited to the ability to meet specific job requirements, but it may still have a chilling effect on the job-seeking behaviors of those who have severe health problems.
Plans Offered
Most employers offer multiple plans so that they do not bear the onus of forcing their employees to participate in a specific plan. Because of the antipathy among Americans to plans that do not allow a choice of providers, most offer a point-of-service plan as well as the basic plan and plans with alternative tiers of deductibles and co-payments.
Some employers also offer cafeteria plans which allow employees to select customized sets of benefits that best meet their individual needs, including or excluding health care benefits. Cafeteria plans are also called flexible benefit plans or Section 125 plans after the applicable section of the Internal Revenue Code.
Relationship With Insurers/Self-Insurance
Employers have the option of bargaining with insurers or of self-insuring. A self-insured plan may be administered by the employer or by an insurance company or third-party administrator, but regardless of who administers it, the employer takes the risks and rewards of the resulting underwriting loss ratios. This alternative is available only to large organizations, but it offers a number of advantages, as well as the disadvantage of reducing the size of the risk pool that is covered under a single plan. Park (2000) reported that in 1994 about half of all covered U.S. employees worked for self-insured employers. This proportion reached 85% in firms with more than 1,000 employees and 75% in multistate companies.
Worker Education, Disease Management and Worksite Wellness
Increasingly, employers are providing wellness and disease management programs directly or through their insurers. Most commonly, they provide wellness promotion through Web-based portals. Some employers provide personal interventions. Rapidly growing Quantum Health Care’s personnel will call an employee who makes a doctor’s appointment and suggest questions to ask the physician, “help them choose the right specialist, give them advice about which tests to take, and ensure that tests are not duplicated” (Gogoi, 2006, p. 80). Quantum Health is compensated through savings and can provide employees with incentives to use preventive services. Employers can also provide incentives for healthy behaviors, such as not smoking or joining and using a health and fitness club. Some are changing the workplace environment to promote health—for example, placing parking lots away from the building, publishing walking maps and holding walking meetings, installing exercise equipment on site, and replacing high-calorie, high-fat food and drink in lunchroom vending machines with more healthy fare. The Centers for Disease Control and Prevention decorated its stairwells with art and piped in music to make them more enticing to employees who might otherwise take an elevator.
Employers have a strong interest in promoting medical savings accounts, which shift more of the costs of routine medical care to the employees while still providing catastrophic care insurance. In the future, employers are likely to add incentives for their employees to take advantage of medical tourism when the timing of treatment for major interventions can be controlled. Case 6-1, Global Medical Coverage, looks at the ups and downs of this phenomenon in one corporate situation.
Insurers
Insurers are intermediaries between payers and patients. Many insurers provide a wide array of insurance products and work to sell employers on the economics of one-stop shopping for all of their insurance needs. Others offer only or primarily health insurance products. Some are for-profit and some are not-for-profit. They all compete in the same market with similar products offered under the same state regulatory requirements. Insurers compete with each other based on price (driven by costs), their ability to keep enrollees happy, and their ability to come up with creative solutions to perceived problems.
Historically, insurance has been described as “driving through the rearview mirror.” Premiums were based on experience rating, namely the past claims experience of one’s employees or similar employee groups. If claims were high in one year, losses could be recouped by raising premiums the next. Even when changing insurers, one cannot necessarily run away from a costly claims history. Underwriting departments examine past data and the composition of the work force and decide whether to take on a group and, if so, at what premium level. Their analyses are backed by statistical analysts, called actuaries, who estimate trends in costs and claims and forecast outcomes.
Method of Organization
The insurer can provide insurance only, or it can also provide health care services as well. Organizations that combine both insurance and care management functions tend to be called health maintenance organizations (HMOs). If the company is only an insurer, it negotiates the terms of contracts (policies) with providers and with the enrollee. It collects a premium up front and invests it in reserves until claims are filed. Corporate profits are a function of claims history, operating efficiency, and investment earnings. If the investment income is sufficient, premiums can be less than the combined costs of operating and paying claims. If a company provides coverage at sites where it does not maintain much of a presence, that company may use a third-party administrator to process claims and provide other services locally.
Reinsurance
Insurance is a business of taking risks. If the insurer decides that the risk is too great to take alone, it may purchase reinsurance against unacceptable losses (also called stop loss insurance) from one or more other insurers.
Method of Payment
The payer wants to motivate providers to look after its interests. In economics this is called an agency issue. For health care providers, agency is a major issue because the physician is already an agent for the patient, and thus, if the provider is also expected to be an agent for the payer or the insurers, this sets up a potential conflict of interest. To exert some influence over clinical decision making, insurers have experimented with a number of alternative ways of paying for care. Table 6-2 lists various contract options used by insurers and also identifies the dominant organizational form associated with each payment method and the degree of control that each method exerts on providers.
Health insurance companies historically paid for care on a fee-for-service basis, with the provider establishing a fee schedule and billing accordingly. Then large payers, especially the Blues, began to take discounts, and Medicare and Medicaid took even greater discounts to the tune of 40% to 60%. Some payers contract with their key network providers, usually primary care gatekeepers, to assume some of the risk and allow a withhold from their payments until a certain settlement date, at which time each provider receives some or all of the withheld funds depending on their cost performance. Today, a number of payers are experimenting with pay-for-performance plans that offer additional compensation for meeting certain quality criteria, especially in the areas of prevention and following evidence-based practices. Capitation involves giving the provider so much per enrollee per time period and leaving the provider to take the profit or loss on the actual transactions for the period. For example, a primary care provider might be given a certain amount per member per month to cover primary care and diagnostics. Sometimes the costs of subspecialty referrals are included, which puts the primary care provider at even greater risk. Provider organizations may choose a staff-model HMO structure as well. Where state medical practice acts allow, physicians may be employed directly. Otherwise, they form a separate partnership entity that contracts (sometimes exclusively) with the HMO to deliver services. In such cases, the arrangement may offer additional compensation to the physician group if it meets certain targets.
HMOs
As Chapter 3 noted, HMOs started out as providers that integrated prepayment and service delivery into a managed care system, usually with a closed panel of providers. Over time, that distinction has blurred. Today HMO is virtually synonymous with a managed-care organization. It is an organization that does more than pay claims. It takes responsibility for the quality and content of care over a period of time.
TABLE 6-2 Compensation Arrangements for Physician Health Care Services
Type of Fee Arrangement
Associated MD Organization
Cost Risks Allocated to
Payer Control
Comments
FFS
Independent partnership
Insurer
Weak
Rapidly disappearing
Discounted FFS
PPO
Insurer
Relatively little, some through review process
Includes Medicaid and Medicare under assignment
Discounted FFS with withhold
PPO or IPA-type network
Mostly insurer
Relatively weak
Often associated with gatekeeper roles
Discounted FFS with performance incentives
PPO or IPA network, heavy concentration in one payer
Mixed
Some through incentive structure
Frequently related to quality and not quantify
Mixed capitation-FFS
HMO network
More to provider
Some through structure of payments
May include hospitalists and other specialists
Capitation
HMO contract
Provider
Must review quality
Few providers can tolerate risks for long, little enrollee choice
Salary and bonus
Staff model HMO
Mixed
Potentially high
Medical practice acts often limit control
FFS = fee-for-service; PPO3preferred provider organization
There are a number of ways of setting up the HMO–provider relationship:
•Staff model: Physicians are employed or in a captive group with physicians on salary, with or without profitability bonuses.
• Group model: A physician group accepts capitation from the HMO and allocates the capitation payments among its members.
• Network model: The HMO contracts with groups and individual physicians to take care of its enrollees. Providers may be paid by capitation or on a discounted fee-for-service basis.
• Individual practice association (IPA) model: A set of practices contracts as a whole for payment under either capitation or discounted fee–for–service.
Plans Offered
Insurers usually offer an array of plans to meet employer demands. Most corporate benefits managers would prefer to leave the choices up to employees rather than risk a backlash from dissatisfied employees who believe the company is forcing them to use a specific plan or specific provider. The recent trend has been toward point-of-service plans that make even more provider choices available, but at additional cost.
Case Management/Carve-Outs
Many of the problems in patient care occur because of a lack of coordination. A patient stays in the hospital extra days because the family cannot arrange care at home or no one in the area does a recognized procedure for treating a rare but costly problem. Payers have responded by employing case managers for costly cases. Where there is better expertise outside the organization, they may carve out a set of cases, such as diabetes or congestive heart failure, for a specialized contractor to manage. This is typically done where mental illness is covered (carrying the dubious name behavioral health) because the insurer’s professionals may be familiar only with medical/surgical cases. In many markets, they have contracts with most established acute-care providers. Case managers often oversee services provided after hospital discharge and may act as patient advocates within the hospital. In some situations, they may recommend providers who are especially qualified to deal with rare situations; however, there are concerns about a payer representative directing someone to a provider because the dominant criterion might be cost rather than quality. In 2002, the American Case Management Association (2006), whose members are predominantly nurses and social workers, defined its field as follows:
Case Management in Hospital/Health Care Systems is a collaborative practice model including patients, nurses, social workers, physicians, other practitioners, caregivers, and the community. The Case Management process encompasses communication and facilitates care along a continuum through effective resource coordination. The goals of Case Management include the achievement of optimal health, access to care, and appropriate utilization of resources, balanced with the patient’s right to self-determination.
Utilization Constraints
Precertification is one device widely used to control hospital use. The provider must obtain authorization before admission for common procedures and usually is told how many inpatient days are allowed. If the admitting physician wishes to keep the patient longer, he or she must notify the insurer and get reauthorization for the additional costs if the insurance company is to pay. Certain procedures must be preauthorized because they are expensive or experimental, so the insurer’s medical staff must agree beforehand that the intervention is medically necessary.
Although most providers object strongly to these measures, they are not as draconian as they appear. If the provider pushes back hard enough, the insurer usually lacks a scientific reason for rejecting the physician’s definition of medical necessity and ultimately gives in. Much of the cost reduction seems to come from the sentinel effect—providers change behavior just because they know that someone is watching.
Insurers have experimented with a number of ways to reduce inappropriate utilization of health care resources. They profile providers to identify outliers in terms of costs per diagnosis, consumer satisfaction, and appropriateness of treatment, and they cancel contracts with those who appear out of line. The federal government has profiled physicians on the basis of their distribution of codes used for office visits, using the data as indicators of “fraud and abuse.”
Consumer Education
Insurers have partnered with employers to provide consumer education materials, guidelines, and events. They advertise their skill at this type of information dissemination and are continuously upgrading their Internet portals for more and better customized information for each enrollee, from the worried well to the chronically ill.
PROVIDERS
Professionals
For many years, most physicians and dentists were in solo practice or a simple partnership. These have gradually been replaced by entities that mix the partnership and the corporate form under the titles of professional association (PA) or limited liability partnership or corporation (LLP or LLC). They maintain professionals’ control, but offered tax advantages, greater access to capital, and/or protection from some liability claims other than malpractice. Which entities are acceptable depends on each state’s corporate practice of medicine act and its medical licensing board’s interpretation of that act. For example, Texas does not allow LLCs or LLPs (Texas Medical Board, 2006).
Essentially, most medical practice acts restrict the practice of medicine to an individual licensed practitioner and forbids others from exercising such privileges. The Medical Board of California states that the legislation “is intended to prevent unlicensed persons from interfering with or influencing the physician’s professional judgment,” and it governs the following (Medical Board of California, 2006):
• Determining what diagnostic tests are appropriate for a particular condition
• Determining the need for referrals to, or consultation with, another physician/specialist
• Responsibility for the ultimate overall care of the patient, including treatment options available to the patient
• Determining how many patients a physician must see in a given period of time or how many hours a physician must work
• Ownership is an indicator of control of a patient’s medical records, including the contents thereof, and should be retained by a California-licensed physician
• Selection and hiring/firing (as it relates to clinical competency or proficiency) of physicians, allied health staff, and medical assistants
• Setting the parameters under which the physician will enter into patient care services
• Decisions regarding coding and billing procedures for patient care services
• Approving of the selection of medical equipment and medical supplies for the medical practice.
Similar boards and distinctive regulations also govern other health care providers, including nurses, pharmacists, dentists, and physical therapists.
With these restrictions, how can HMOs, hospitals, and physician practice management firms (PPMs) buy physician practices and merge them into a horizontally or vertically integrated care system? Kaiser-Permanente, a long-standing and respected integrated system with much of its operations in California, has been able to do this by separating the medical practice component from everything else. After 1955, Kaiser-Permanente split into three organizations—two nonprofits, one for the health plan (insurance and administration) and one for the owned hospitals, and a for-profit organization for the physicians. Subsequently, to meet the requirements of the medical practice acts, the physician groups have become separate entities in each state or section of a state. The Kaiser health plan contracts with the local medical group for physician services. Kaiser physicians tend to self-select on the basis of values other than income maximization, but negotiations have been contentious at times.
Emergency departments are an area where there are conflicting concepts of professional practice responsibilities. At least half the emergency rooms in the country are staffed under contracts with PPMs that specialize in staffing and operating these 24/7 activities that are not of much interest to other community physicians. The PPMs and the American Academy of Emergency Medicine have been at odds over due process for their contract physicians, proportion of professional fees going to them, job opportunities for board-certified individuals, and physician access to billing and economic data on their worksites (McNamara, 2006). Most health care professionals other than physicians can be employed directly. They sometimes require supervision by a physician and sometimes not.
These examples show the balancing act the political system goes through to maintain professional accountability for services and enforce licensure requirements, yet avoid sustaining the old professional monopolies and not interfere too much with appropriate labor substitution and the development of integrated health delivery systems.
Practice Ownership
As physician incomes dropped in the 1990s, many physicians chose to sell their practices to new organizational entities or to form associations to deal from strength with payers and the hospitals. These numerous and sometimes complex relationships led to the Alphabet Soup of the 1980s and 1990s. Alternatives have included the following:
• Selling out
• To HMOs that were developing integrated service organizations, often without ownership of the hospital component
• To hospitals that were attempting to develop integrated delivery systems and capture patients through their physicians
• To academic medical centers that also were attempting to develop integrated delivery systems
• To publicly traded PPMs, which were in vogue in the 1990s, but then ran into profitability problems due to their inability to increase physician productivity
• To others
• Taking greater risks in return for greater rewards (ideally)
• Accepting capitation, which involves a fixed payment for providing care to an enrolled population for a defined set of services per member per month. It has tended to be too risky for all but the largest integrated practices and IPAs.
• Joining IPAs, which contract with the managed care organization, usually for capitation, and then allocate the work and the revenue to their members.
• Partnering with institutions
• Physician-hospital organizations, usually formed to contract with managed-care plans
• Medical service organizations, often owned by hospitals that provide management and support services to independent practices and may purchase certain practice assets in the process, presumably at a fair market price
• Withholds, which are usually associated with a gatekeeper role and involve the payer holding back some portion of the negotiated fee as a risk pool in case of cost overruns
• Community hospital, often by seeking more board representation in hopes of influencing the impact of cost cutting on providers
• Pricing
• Negotiating the fees paid under managed care contracts. Practices’ bargaining power varies widely. If a practice is large, provides a scarce resource, or includes a substantial number of the payer’s enrollees, it can and should bargain. If the practice is small and has many competitors, it can do little more than accept the discount structure offered. In large urban areas, a practice may contract with many payers. In rural areas, options for either or both parties may be limited.
• Refusing to accept insurance or specific plans such as Medicaid or Medicare. If a provider believes enough paying patients would be willing to pay directly, the provider may refuse to accept insurance payments. The patient can either pay directly or file directly for insurance, usually based on paperwork supplied by the physician’s office. The risks of reduced payments, denials, and deductibles then rest with the patient.
• Offering boutique or concierge medicine, in which the provider, usually a primary care provider, agrees to provide outpatient care for a fixed annual fee, taking many fewer patients and having more time to devote to the concerns of each one. Some practices meld both insurance and an annual fee for personalized service.
• Refusing to accept assignment from Medicare, perhaps on a patient-by-patient basis. Providers who accept assignment from Medicare agree to charge patients no more than the Medicare approved amounts. This includes co-payments and unmet deductibles. Money is paid directly to the physician by the Medicare Part B intermediary. Physicians who do not accept assignment receive somewhat less (currently 5% less) from Medicare, but are allowed to bill the patient for an additional amount (called balance billing), capped at 15% above the lower schedule. The Medicare intermediary writes the check to the patient, who must then write a check for the full amount due to the nonparticipating physician.
Services Offered
Physicians can organize by specialty or join a multispecialty group. Solo practice is an option for some, but most prefer a group partnership to deal with issues of after-hours coverage, efficiency of operation, economies of scale, contract negotiation, collegiality, and intellectual stimulation. Group stability tends to vary widely depending on personalities and degree of agreement on lifestyle and work life objectives, which, of course, change over time. Academic medical centers tend to be organized along rigidly specialized lines, whereas the multispecialty group practice is more prevalent in the outside community.
Dividing lines between specialists and generalists are often fuzzy. Primary care providers may perform procedures often left to specialists. Examples include radiologic exams and sigmoidoscopy in primary care practices and automated neurologic testing in primary care offices. Some insurers offer incentives to PCPs to added outpatient services, such as sigmoidoscopy, that otherwise would require a specialist referral.
Incentives
The health policy literature devotes ample attention to the misalignment of incentives in the health care system. Providers are encouraged by fee-for-service payment systems to promote overutilization, whereas payers and HMOs might provide incentives that encourage underutilization. The issue is how to define and incentivize right-utilization based on scientific knowledge and expert assessments. Free-market capitalism is fueled by ever-increasing consumption and health care is no exception.
Pay-for-performance, also known as pay-for-quality, is a current hope of many interested in health policy. It involves providing incentive payments (usually as a percentage of the usual negotiated fees) to those provider network members who conform to certain process requirements, such as computerized prescription order entry, computerized billing, and meeting targets for preventive services. For the most part, it does not mean achieving specific clinical outcomes because of the difficulty of recording and then effectively risk-adjusting clinical outcomes. What payers do not want to do is motivate the better clinicians to avoid difficult or high-risk cases just to improve their numbers.
Plan managers who want to encourage provider participation can also enhance the rates they are paying to a desired group. Medicaid plans in a number of states, for example, have raised obstetrical fees to get more women into care earlier, even while holding down or reducing other fees.
Disincentives for utilization are numerous and varied. We all hear litanies of the numbers of calls a practice makes in a day to get prior approvals and reverse denials. Some insurers seem to use denials as a hurdle the office staff must clear in order to get paid, but paid late.
Providers also have to keep in mind that their decisions might be reviewed by the insurer’s utilization review staff, by Medicare and Medic-aid’s data-mining fraud and abuse computers, and by the hospital’s quality audit staff. Any one of these may cost future business income.
Porter and Teisberg (2006) offered an alternative view of incentives. They argued that the current competition in health care is based on an inappropriate zero-sum mentality. Providers attempt to do the following:
• Provide the broadest range of services to avoid movement to other providers or locations
•Tie patients into their system for the broadest possible range of services
•Reduce utilization through hurdles, barriers, co-payments, and deductibles.
They suggest a somewhat utopian alternative mindset in which the focus of all payer and provider decisions would be on maximizing the value of health care for the patient. We revisit some of their proposals later on.
Patient Relationships
Individual providers and provider organizations are becoming increasingly sensitive to their service reputations with patients they want to keep. This is due in part to the widespread use of consumer satisfaction surveys by payers and employers. Consistent negative evaluations can affect their access to patient revenues, but an even more important reason is the increasing competition for the patient’s attention, especially as more and more commercial entities try to disintermediate traditional patient–provider relationships. For example, emergency room waiting time increased from 38 minutes in 1997 to 47 minutes in 2004 (National Center for Health Statistics, 2006). This has prompted development of alternative systems for delivering acute care on a low-cost, rapid-access basis, especially as insurers take measures to discourage using hospital emergency rooms as dispensaries. Urgent care centers and clinics staffed by nurse practitioners and physician assistants are appearing in chain stores such as Wal-Mart and Target. They charge less and offer shorter waiting times and their longer hours help patients and family members avoid lost wages. Their efforts seem focused on the needs of uninsured families. It is interesting to speculate how this system might develop as the number of individuals without insurance increases. Another example is Wal-Mart offering a low fixed price for a month’s supply of a broad array of generic prescriptions.
Primary care practices have responded by setting aside a larger portion of their day for same-day acute care visits. This has meant longer waits for those needing routine physicals and checkups. Available software has enabled practices to handle more prescription renewals and patient inquiries without telephone calls and visits and to schedule same-day visits effectively. Some insurers also compensate physicians for responding to patients via the Internet.
Primary Versus Specialty Care
In most countries, the gatekeeper role of the primary care physician is critical to the efficient functioning of the health care system. In the United States there is considerable confusion, much of it purposely created, about the role of primary care and how it is delivered. Most U.S. patients do not hesitate to self-refer to a specialist based on their personal assessment of the problem. Specialists encourage this by advertising themselves as primary care providers for specific populations. An example would be a sports medicine clinic. It would likely be part of a specialized orthopedic practice.
A male patient who uses an academic medical center and has a chronic heart problem might select as a primary care physician, someone who is in the
• Family medicine department
• General internal medicine division of the internal medicine department, or
• Cardiology division of the internal medicine department.
His children could go to either pediatrics or family medicine and their mother to either OB/GYN or the practices listed above. For eye care, the family could go to an ophthalmologist or an optometrist, unless tertiary care is required. The family also has similarly confusing choices among physicians in the community, not to mention additional choices among chiropractors, urgent care centers, and community health centers.
There was once great hope for integrated health systems built around multispecialty groups linked to one or more community hospitals; however, that has not proved as successful as hoped for and is threatened by the development of specialty hospitals and ambulatory surgery centers.
Efficiency
Providers work hard to increase the number of patients seen. Visits have been continually shortened. More and more practices have added not only nurses and nursing assistants, but also nurse practitioners, physician assistants, and certified nurse midwives. Physicians have resisted computerized systems that fail to speed up their work processes, but have added computer systems where they anticipate improved efficiency and embraced electronic claims filing. One of the drivers for same-day appointment systems is that they tend to eliminate no-shows and increase practice throughput.
Distribution of Specialties
Over time, the availability of physicians in specific fields reflects perceptions of income potential. Average physician income in constant dollar terms has fallen 7% over the most recent 8 years for which data are available. The income of primary care providers fell 10% during the same period. Increasingly, medical students have chosen to avoid primary care training (family medicine, pediatrics, and general internal medicine) and have chosen instead specialties that produce fees for performing procedures. An orthopedic surgeon could expect to earn roughly twice the income of a primary care physician after expenses (Abelson, 2006c). As the experience of other countries and studies of small area differences in practice patterns indicate, the prevalence of specialists and other resources often seems to influence the amount of care delivered, some of which is of questionable value to patients, even at the medical centers with the most prestigious reputations (Fisher et al., 2004).
Institutions
The dominant actor among health care institutions has been the general hospital, especially community hospitals and academic medical centers. The array of institutions delivering care, however, includes community health centers, specialty hospitals, large integrated systems, large multisite practices, state and local government hospitals, pharmaceutical companies, and other vendors.
Relationship to Providers
Much of the time, a key institutional objective is to capture a large population for its services. If one accepts the primary care provider as a gatekeeper, the way to increase activity is to capture referrals from local gatekeepers, especially if insurers constrain self-referral. This has been why hospitals, academic medical centers, and others have bought so many primary care practices and have worked to put satellite centers in shopping centers and continuing care retirement communities. They want the referrals, together with the ancillary revenues in their laboratories, operating rooms, and imaging centers. Their behaviors epitomize the zero-sum mentality Porter and Teisberg (2006) cited as a core problem behind the growth in health care costs.
Despite extensive regulations designed to prevent institutions from buying referrals, there is a continuous effort to bind referring providers to the institution. Hospitals build office buildings on site or in high traffic areas, offer physicians seats on hospital boards, and give them influence over the capital investments the hospital makes.
Pharmaceutical companies donate samples, provide educational lunches and speakers, and support technical society meetings. Some even make large donations to charities controlled by private-practice physicians that fund research and medical residency programs (Abelson, 2006b).
Efficiency
Institutions, including large medical practices, have to decide how to configure their staff and facilities for the efficient use of all their resources. They must conform to all sorts of regulations and restrictions and still come up with an efficient and effective delivery system. Especially sensitive areas include staffing and labor substitution. Because these institutions are loosely coupled organizations, most departments try to operate as independently as possible and tend to emphasize growth over reduced use of resources. Interest in saving resources tends to focus on scarcity situations. For example, a Leapfrog Group standard calling for the use of intensive-care hospitalists in every intensive care unit would have required a fourfold increase in the number of these specialists; however, telemedicine capabilities have enabled these specialists to cover the intensive care units of a number of hospitals at once. Initial results shows that this system still yields significant results in lives saved and costs avoided (Mullaney, 2006).
Staffing
Perhaps no debate rages as long or as loudly as whether an institution is staffed adequately. Health professionals usually see themselves as overworked because there is always more that could be done for the patient. The demand for their services is highly variable, and thus, there are peak periods when they are under pressure to go faster. That is not without risks, but staffing only for peak demand results in considerable lost value the rest of the time. There is usually a dynamic tension, therefore, between professional leadership and institutional management over whether more staff is warranted.
There are areas where staffing shortages are critical, such as nursing and child psychiatry. There is an increasing body of evidence that adverse hospital events, such as hospital-acquired pneumonias and urinary tract infections, are associated with low levels of nurse staffing and nursing staff education (Stanton, 2004). The market response is to raise wages, and most institutions try that. It does work over time. Nursing education programs are expanding as potential students are increasingly attracted by rising wages and plentiful employment opportunities; however, institutions are also sensitive to the increased salary costs. The pressure to develop and license substitutes is great.
Labor Substitution
Current areas of contention related to labor substitution include the educational requirements for registered nurses, substitution of other nursing staff for registered nurses, the degree of independent practice allowed nurse practitioners and physician assistants, substitution of anesthesiologist assistants for nurse anesthesiologists, and granting prescribing authority to psychologists. These battles differ from state to state, but it is not unusual for the health committees of state legislatures to devote a significant amount of their time to scope of practice issues. The currently dominant professional group usually objects strongly to substitution. The training and licensure of substitutes are usually justified at first on the basis of work-force shortages. After a new group gains a foothold in some states and establishes an acceptable safety record, its members push for privileges in other states as well.
Institutions see these substitutions as having potential for leveraging expensive staff members and for allowing flexibility in work team composition. A secondary issue is sometimes control. In a hospital, for example, nurse practitioners usually report to the director of nursing, whereas physician assistants report to a different administrative unit or to the medical staff directly. Medical staffs often prefer the latter.
Scope and Scale of Services
Institutions can add or drop programs. Many hospitals are dropping services that do not appear to pay for themselves. The risk is patients and providers will go somewhere else to access a missing service and not come back.
Pricing/Discounts
California hospitals received only 38% of what they “charged” in 2004. As noted, they do not offer meaningful price lists and try to deal with payers individually. Monopsonistic federal and state programs arbitrarily set their own payment levels, but there is room to negotiate with large insurers. The individual consumer usually lacks reliable information on which to compare costs or quality, the cornerstone comparisons of any consumer-driven health care system.
Quality Improvement
Institutions are the key to quality improvement. They have the data and operate on a corporate model that can support improvement and change. Accreditation requires that they show that quality-improvement efforts are under way. The main problem remains provider involvement. Institutions that have effective programs, however, have achieved major outcome improvements. As quality is increasingly reported, these programs should begin to pay off in improvements in patient volumes and increased reimbursements under pay-for-performance initiatives.
Consumer Information
Institutions, just like insurers, woo consumers with Web portals and informational advertising. They advertise “ask–a–nurse” lines to capture self-referrals and increase patient loyalty. They work with primary care providers to stimulate referrals and set up centers of excellence to enhance visibility in the marketplace for profitable procedures.
Credentialing Decisions
Many physicians cannot serve Medicare and Medicaid patients without hospital privileges, even if they have predominantly outpatient practices. Hospitals can award or withhold these privileges through their credentialing processes. Credentialing is intended to assure quality of care and patient safety, but there are also opportunities for economic credentialing—rewarding physicians who bring in profitable patients and penalizing those who own competing organizations.
Involving Payers in Change Decisions
The impact of changes may benefit others rather than the institution. One strategy is to involve the payers in the change process so that they can explain to staff where the costs of the institution are out of line with competing providers and also see how the bottom line of the provider is affected by process changes. For example, Virginia Mason Medical Center in Seattle teamed up with Aetna and Starbucks to look at the cost of treating back pain cases. It found that it was not responding rapidly enough and that many cases could be referred directly to physical therapy without expensive magnetic resonance imaging. Those cases that appeared complicated were sent to specialists for workups, but those that were acute without sciatica were treated promptly at much lower cost. After a review of the finances by Aetna and Starbucks, Aetna agreed to increase the payments for physical therapy to offset some of the lost income (Fuhrmans, 2007b).
Professions
Professional societies and their representatives can have a major influence on the cost, quality, and access dimensions of health care. Starr (1982) documented the American Medical Association’s long and strong opposition to universal health insurance as a primary reason we do not have it today. Because the societies test and credential their members, they also have a major potential to influence the quality of the care provided.
Quality Improvement
Two physician leaders of the quality movement, Lucian Leape and Donald Berwick (2005), point to their profession’s need for autonomy and authority as a major barrier to the implementation of many quality improvement measures. They argue that a climate devoted to safety would require acknowledgment of errors and additional teamwork to reduce them. They suggest a number of interventions that include parallel and coordinated enforcement of standards by the Joint Commission, Medicare and Medicaid, the American Medical Association, and a system of incentives for implementing safe practices and disincentives for the continuation of unsafe ones. In 2003, JCAHO began to require hospitals to implement 11 safety practices and added more in 2005. The error rate reductions reported at specific institutions are quite impressive:
• 62% reduction in ventilator-associated pneumonias
• 81% and 90% reductions in medication errors
• 15% reduction in cardiac arrests
• 66% and 78% reductions in preventable adverse drug reactions (Leape and Berwick, 2005).
Their efforts have been expanded into the 100,000 Lives program discussed in Case 11-1, which appears to have saved over 122,000 lives already and will continue to expand. With medical error frequently cited as the eighth largest cause of death in the United States, continued research and system improvement efforts seem to have a momentum of their own.
Provider Education
Most professions have continuing education requirements linked to certification and licensure. Providers must maintain proficiency in their field and retake professional examinations at prescribed intervals. Given the data on regional variability in care, one must question how up-to-date and evidence-driven these courses tend to be. Some subspecialty groups are also considering requirements for participation in quality improvement programs as part of their recertification process (Solliceto et al., 2006).
Consumer Education
Professional societies also undertake consumer education programs designed to persuade potential patients to use their members. Often it is hard to differentiate between consumer education and advertising in defense of professional turf. Societies often lend their names and data to other advertising campaigns acceptable to their professional ethics. There is considerable risk in doing this because new data might show that they supported a policy or product that later turns out to be counterproductive.
CONSUMERS
The choices consumers make involve their preferences and the options available. Until recently, most viable options have been related to employment and public assistance, but options are increasing.
Plan Selection
During the managed care revolution of the 1980s and 1990s, plans were quite restrictive in their efforts to keep members within their provider networks. After consumers rebelled, insurers expanded their networks and offered point-of-service options. Users also had to decide what gambles to take in terms of deductibles and co-payments, balancing premium costs above the basic employer plan against anticipated out-of-pocket costs during each enrollment period.
Retirement Planning
Middle-and upper-income families also have to plan for their health care needs during retirement, especially given the increasingly shaky status of employment-based coverage for retirees. They must make decisions about coverage during retirement, long-term care insurance, specialized insurance, and income needs.
Provider Selection
Individuals want to continue their provider relationships if they are satisfactory. They have made their preference for not changing providers clear. Most of those forced to change providers have been members of Medicaid managed care or retiree benefit programs with restricted choices. This is why patients’ quality concerns seem to center on the affective relationships with their providers, and that is the focus of most consumer quality assessment questionnaires. Technical proficiency or outcome measures may be available, but where they exist, consumers have to be alerted to their availability and shown how to interpret them. Bedside manner still is important, especially when interactions with providers have been shortened by productivity and income pressures.
Self-Help
Increasingly plan members are steered to Internet self-help sites. Many large insurers, including HMOs, provide customized Web portals for their insured, which build on diagnoses reported by network providers. These portals provide information on treatment and prevention as well as links to lower cost providers of complementary services and supplies. Experiences with these sites may encourage enrollees to search further on their own and study available quality information on potential providers.
Insured With Low Likelihood of Use
Many of the insured have little likelihood of using services during a particular time period. Some 20% of the population under 65 accounts for 80% of that group’s expenses. Given the recent imposition of increased deductibles and co-payments in many plans, even those seeking acute, episodic care may not file claims except to build their deductibles just in case. Members of this group would be the candidates for medical savings accounts and high deductibles, that is, consumer-driven health care. If they remain healthy, there are no claims and their premiums go down further, but if they have major claims, they are covered for amounts for catastrophic events above the large deductible.
This is a group where the important arena is prevention. If their insurer, their employer, or the media keep them informed of risks of chronic and acute disease and they follow valid advice, they should benefit like everyone else. The question still to be answered is whether they will behave differently from the untreated population in general and whether efforts to reach them will induce changes. There are factors pushing in both directions. Physicians are known to be a strong force for change when they have a bond with the patient. Yet these individuals might not visit a primary care practice regularly nor form a bond with the provider staff. On the other hand, they will have some financial motivation to stay healthy.
FOR-PROFIT VERSUS NOT-FOR-PROFIT
We noted at the start of this chapter that for-profit and not-for-profit firms operate side by side in many sectors of health care. One policy decision is whether to encourage one form or the other in the private sector or to ignore the issue. Hansmann (1996) noted that the not-for-profit portion of the economy has grown steadily.
Nonprofit firms commonly arise where customers are in a peculiarly poor position to determine, with reasonable cost or effort, the quantity or quality of the services they receive from a firm. As a consequence, assigning ownership to anyone other than these customers would create both the incentive and the opportunity for the customers to be severely exploited. At the same time, the customers are so situated that the costs to them of exercising effective control over the firm are unacceptably large relative to the value of their transactions with the firm. The solution is to create a firm without owners—or, more accurately, to create a firm whose managers hold it in trust for its customers. In essence, the nonprofit form abandons any benefits of full ownership in favor of stricter fiduciary constraints on management (Hansmann 1996, p. 228).
Many of the same issues get cited as the sociological grounding of professional status and autonomy for health care providers. Somehow, accountability must be established to protect the interests of the patients when only highly imperfect information is available to the individual at risk.
THE VALUE-DRIVEN CARE INITIATIVE
What if we were to make the value offered to the patient the basis of competition in the health care marketplace? This is the objective suggested by Porter and Teisberg (2006). To achieve this focus they recommend the following:
• Mandating participation in health insurance by all, with subsidies for low-income participants
• Focusing on the complete disease management process at the level of specific medical conditions (such as coronary artery blockage) to optimize process coordination and efficiency and information flow
• Providing reliable and relevant information at the medical condition level on total cost and outcome
• Organizing systems of care to compete on the basis of maximum patient value, which they believe would result in narrower product lines in community hospitals, more referrals of complex and rare cases to centers of excellence, and more organization into multisite (horizontally integrated) systems
• Reporting all process steps electronically, producing reports that give bundled costs of care across providers and institutions, and providing more extensive follow-up and reporting of outcomes
• Creating extensive incentives to reduce duplication and waste and improve quality for each medical condition at all process stages.
Figure 6-1 revises Figure 3-2 to include this alternative along a continuum of market power. Despite its emphasis on competition, we have put it under an administered system because it is going to have to be buyer-driven at the onset.
Their analysis has attracted considerable interest among employers because it is easy to understand in terms of the industrial model for marketing and operational improvement, appears likely to support new forms of oligopolistic competition, and draws parallels from consumer experiences with the rationalization of other professional services where the consumer was once considered unable to make decisions (such as travel, insurance, and financial services). The impact on the professions and health care delivery institutions of such a major shift in emphasis would be profound. Just what would kick-start it and drive it over the opposition of entrenched interests is hard to contemplate. That is why we referred to it above as somewhat utopian. On the other hand, it would make great sense if we were building our health system from scratch.
CONCLUSION
The health care marketplace is very complex. Many actors and many alternatives merit consideration as the system tries to strike a balance between overutilization and underutilization and as the commercial aspects of health care become increasingly apparent. We will develop an approach to the evaluation of these alternatives in subsequent chapters, recognizing that there is unlikely that any one approach could keep everyone happy.
FIGURE 6-1Modified Stages of Health Care Market Power

Case 6–1 GLOBAL MEDICAL COVERAGE
BACKGROUND
Blue Ridge Paper Products, Inc. (BRPP) in Canton, NC is a paper company making predominantly food and beverage packaging. It was the largest employer left in Western North Carolina in 2006, with 1,300 covered employees in the state and 800 elsewhere. Started as a Champion Paper plant in 1908, it was purchased by the employees and their union (a United Steelworkers local) in May 1999 with the assistance of a venture capital firm and operates with an Employee Stock Ownership Plan (ESOP). To purchase it, the employees agreed to a 15% wage cut and frozen wages and benefits for seven years. From the buyout through the end of 2005, the company lost $92 million and paid out $107 million in health care claims. It became profitable in 2006. Maintaining health benefits for members and retirees is a very high priority item with the employees and the union, although retiree medical benefits have been eliminated for salaried employees hired after March 1, 2005.
BRPP employees are “predominantly male, over 48, with decades of services and several health risk factors. They work 12-hour, rotating shifts, making it extremely difficult to manage health conditions or improve lifestyle” (Blackley, 2006). The ESOP has worked hard to reduce its self-insured health care costs. Health insurance claims for 2006 had been estimated at $36 million, but appeared likely to hold near $24 million, which is still 75% above the 2000 experience. A volunteer Benefits Task Force of union and nonunion employees worked to redesign a complex benefit system. After two years of 18% health care cost increases, the rate of growth dropped to 2% in 2003. It was 5% in 2004 and a negative 3% in 2005.
Programs initiated in 2001 included a plan offering free diabetic medications and supplies in return for compliance and a tobacco cessation plan with cash rewards. In 2004, the company opened a full-service pharmacy and medical center with a pharmacist, internist, and nurses. In 2005, it began a Population Health Management program. Covered employees and spouses who completed a health risk assessment were rewarded with $100 and assigned a “personal nurse coach.” The nurse coach assists those who are ready to change to set individual health goals and choose from among one or more of 14 available health programs, which may include “cash rewards, waived or reduced co-pays on over 100 medications, free self-help medical aids/equipment, educational materials, etc.”
Where BRPP could not seem to make headway was with the prices paid to local providers. Community physicians refused deeper discounts. Even banding together in a buying cooperative with other companies could not move the local tertiary hospital to match discounts offered to regionally dominant insurers. This hospital was not distressed and had above-average operating margins.
Articles on “medical tourism” in the press and on television attracted the attention of benefits management. Reports were of high quality care at 80% or less of U.S. prices with good outcomes. BRPP contacted a company offering services at hospitals in India, IndUShealth in Raleigh, NC, and began working on a plan to make its services available to BRPP employees.
IndUShealth
IndUShealth provides a complete package to its U.S. and Canadian clients, including access to Indian superspecialty hospitals that are Joint Commission International accredited and to specialists and supporting physicians with U.S. or U.K. board certification. It arranges for postoperative care in India and for travel, lodging, and meals for the patient and an accompanying family member—all for a single package price. For example, it represents the Wockhardt hospitals in India, which are Joint Commission International accredited and affiliated with Harvard Medical International. Other Indian hospitals boast affiliations with the Johns Hopkins Medical Center and the Cleveland Clinics.
Mitral Valve Replacement
One of the first cases considered was a mitral valve replacement. IndUShealth and BRPP sought package quotes from a number of domestic medical centers and could get only one estimate. That quote, from the University of Iowa academic medical center, was in the $68,000 to $98,000 range. The quote from India was for $18,000 including travel, food, and lodging for the patient and one companion. Testifying before the U.S. Senate Special Committee on Aging, Mr. Rajesh Rao, IndUShealth CEO, (2006) cited the following costs.
Procedure
Typical U.S. Cost
India Cost
Heart bypass Surgery
$55,000 to $86,000
$6,000
Angioplasty
$33,000 to $49,000
$6,000
Hip replacement
$31,000 to $44,000
$5,000
Spinal fusion
$42,000 to $76,000
$8,000
EMPLOYEE PARTICIPATION
To encourage employee participation, BRPP prepared a DVD on its medical tourism initiative, which it called Global Health Coverage. It outlined the opportunities and described the Indian facilities and credentials. The next step was to be a trip by an employee “due diligence” committee to India to inspect facilities and talk with doctors. Then they would discuss how to handle the option in the next set of union negotiations.
SENATE HEARINGS
On June 27, 2006, the U.S. Senate Special Committee on Aging held hearings entitled “The Globalization of Health Care: Can Medical Tourism Reduce Health Care Costs?” Both BRPP and IndUShealth presented together with others.
When testifying to the Senate subcommittee, Bonnie Grissom Blackley, benefits director for BRPP, concluded:
Should I need a surgical procedure, provide me and my spouse with an all expense-paid trip to a Joint Commission International-approved hospital, that compares to a 5-star hotel, a surgeon educated and credentialed in the U.S., no hospital staph infections, a registered nurse around the clock, no one pushing me out of the hospital after 2 or 3 days, a several-day recovery period at a beach resort, email access, cell phone, great food, touring, etc., etc. for 25% of the savings up to $10,000 and I won’t be able to get out my passport fast enough.
BLUE RIDGE PAPER PRODUCT’S TEST CASE
The test case under the new arrangement was a volunteer, Carl Garrett, a 60-year-old BRPP paper-making technician who needed a gall bladder removal and a shoulder repair. He reportedly was looking forward to the trip in September 2006, accompanied by his fiancée. A 40-year employee approaching retirement, he would be the first company-sponsored U.S. worker to receive health care in India. The two operations would have cost $100,000 in the United States but only $20,000 in India. The arrangement was that the company would pay for the entire thing, waive the 20% co-payment, give Garrett about a $10,000 incentive, and still save $50,000.
The United Steel Workers Union national office objected strongly to the whole idea, however, and threatened to file for an injunction. The local district representative commented, “We made it clear that if healthcare was going to be resolved, it would be resolved by modifying the system in the U.S., not by offshoring or exporting our own people.” USW President Leo Gerard said, “No U.S. citizen should be exposed to the risk involved in travel internationally for health care services” and sent a letter to members of Congress that included the following (Parks 2006):
Our members, along with thousands of unrepresented workers, are now being confronted with proposals to literally export themselves to have certain “expensive” medical procedures provided in India.
With companies now proposing to send their own American employees abroad for less expensive health care services, there can be no doubt that the U.S. health care system is in immediate need of massive reform
The right to safe, secure, and dependable health care in one’s own country should not be surrendered for any reason, certainly not to fatten the profit margins of corporate investors.
The union also cited the lack of comparable malpractice coverage in other countries. The company agreed to find a domestic source of care for Mr. Garrett, but may continue the experiment with its salaried, nonunion employees. Carl Garrett responded unhappily, “The company dropped the ball …. people have given me so much encouragement,” he said, “so much positive response, and they’re devastated. A lot of people were waiting for me to report back on how it went and perhaps go themselves. This leaves them in limbo too” (Jonsson, 2006, p. 2).
DISCUSSION QUESTIONS
5. How might state and national governments respond to this expanding phenomenon?