Restructuring the U.S. Health Care System

Health

ARNOLD S. RELMAN

Restructuring the U.S. Health Care System

The past two decades have seen major economic changes in the health care system in the United States, but no solution has been found for the basic problem of cost control. Per-capita medical expenditures increased at an inflation-corrected rate of about 5 to 7 percent per year during most of this period, with health care costs consuming an ever-growing fraction of the gross national product. The rate of increase slowed a little for several years during the 1990s, with the spread of managed care programs. But the rate is now increasing more rapidly than ever, and control of medical costs has reemerged as a major national imperative. Failure to solve this problem has resulted in most of the other critical defects in the health care system.

Half of all medical expenditures occur in the private sector, where employment-based health insurance provides at least partial coverage for most (but by no means all) people under age 65. Until the mid-1980s, most private insurance was of the indemnity type, in which the insurer simply paid the customary bills of hospitals and physicians. This coverage was offered by employers as a tax-free fringe benefit to employees (who might be required to contribute 10 to 20 percent of the cost as a copayment), and was tax-deductible for employers as a business cost. But the economic burden and unpredictability of ever-increasing premiums caused employers ultimately to abandon indemnity insurance for most of their workers. Companies increasingly turned to managed care plans, which contracted with employers to provide a given package of health care benefits at a negotiated and prearranged premium in a price-competitive market.

Managed care has failed in its promise to prevent sustained escalation in costs.

When the Clinton administration took office in 1993, one of its first initiatives was an ambitious proposal to introduce federally regulated competition among managed care plans. The objective was to control premium prices while ensuring that the public had universal care, received quality care, and could choose freely among care providers. It was hoped that all kinds of managed care plans, including the older not-for-profit plans as well as the more recent plans offered by investor-owned companies, would be attracted to the market and would want to compete for patients on a playing field kept level by government regulations.

But this initiative was sidetracked before even coming to a congressional vote. There was strong opposition from the private insurance industry, which saw huge profit-making opportunities in an unregulated managed care market but not under the Clinton plan. Moreover, the proposed plan’s complexity and heavy dependence on government regulation frightened many people–including the leaders of the American Medical Association–into believing it was “socialized medicine.”

The failure of this initiative delivered private health insurance into the hands of a new and aggressive industry that made enormous profits by keeping the lid on premiums while greatly reducing its expenditures on medical services–and keeping the difference as net income. This industry referred to its expenditures on care as “medical losses,” a term that speaks volumes about the basic conflict between the health interests of patients and the financial interests of the investor-owned companies. But, in fact, there was an enormous amount of fat in the services that had been provided through traditional insurance, so these new managed care insurance businesses could easily spin gold for their investors, executives, and owners by eliminating many costs. They did this in many different ways, including denial of payment for hospitalizations and physicians’ services deemed not medically essential by the insurer. The plans also forced price discounts from hospitals and physicians and made contracts that discouraged primary care physicians from spending much time with patients, ordering expensive tests, or referring patients to specialists. These tactics were temporarily successful in controlling expenditures in the private sector. Fueled by the great profits they made, managed care companies expanded rapidly. It then consolidated into a relatively few giant corporations that enjoyed great favor on Wall Street, and quickly came to exercise substantial influence over the political economy of U.S. health care.

The other half of medical expenditures is publicly funded, and this sector was not even temporarily successful in restraining costs. The government’s initial step was to adopt a method of reimbursing hospitals based on diagnostic related groupings (DRGs). Rather than paying fees for each hospital day and for individual procedures, the government would pay a set amount for treating a patient with a given diagnosis. Hospitals were thus given powerful incentives to shorten stays and to cut corners in the use of resources for inpatient care. At the same time, they encouraged physicians to conduct many diagnostic and therapeutic procedures in ambulatory facilities that were exempt from DRG-based restrictions on reimbursement.

Meanwhile, the temporary success of private managed care insurance in holding down premiums–along with its much-touted (but never proven) claims of higher quality of care–suggested to many politicians that government could solve its health care cost problems by turning over much of the public system to private enterprise. Therefore, states began to contract out to private managed care plans a major part of the services provided under Medicaid to low-income people. The federal government, for political reasons, could not so cavalierly outsource care provided to the elderly under Medicare, but did begin to encourage those over 65 to join government-subsidized private plans in lieu of receiving Medicare benefits. For a time, up to 15 percent of Medicare beneficiaries chose to do so, mainly because the plans promised coverage for outpatient prescription drugs, which Medicare did not provide.

What about attempts to contain the rapidly rising physicians’ bills for the great majority of Medicare beneficiaries who chose to remain in the traditional fee-for-service system? The government first considered paying doctors through a DRG-style system similar to that used for hospitals, but this idea was never implemented; and in 1990, a standardized fee schedule replaced the old “usual and customary” fees. Physicians found a way to maintain their incomes, however, by disaggregating (and thereby multiplying) billable services and by increasing the number of visits; and Medicare’s payments for medical services continued to rise.

Cost-control efforts by for-profit managed care plans and by government have diminished the professional role of physicians as defenders of their patients’ interests. Physicians have become more entrepreneurial and have entered into many different kinds of business arrangements with hospitals and outpatient facilities, in an effort not only to sustain their income but also to preserve their autonomy as professionals. Doctor-owned imaging centers, kidney dialysis units, and ambulatory surgery centers have proliferated. Physicians have acquired financial interests in the medical goods and services they use and prescribe. They have installed expensive new equipment in their offices that generates more billing and more income. And, in a recent trend, groups of physicians have been investing in hospitals that specialize in cardiac, orthopedic, or other kinds of specialty care, thus serving as competition for community-based general hospitals for the most profitable patients. Of course, all of these self-serving reactions to the cost-controlling efforts of insurers are justified by physicians as a way to protect the quality of medical care. Nevertheless, they increase the costs of health care, and they raise serious questions about financial influences on professional decisions.

In the private sector, managed care has failed in its promise to prevent sustained escalation in costs. Once all the excess was squeezed out, further cuts could only be achieved by cutting essentials. Meanwhile, new and more expensive technology continues to come on line, inexorably pushing up medical expenditures. Employers are once again facing a disastrous inflation in costs that they clearly cannot and will not accept, and they are cutting back on covered benefits and shifting more costs to employees. Moreover, there has been a major public backlash against the restrictions imposed by managed care, forcing many state governments to pass laws that prevent private insurers from limiting the health care choices of patients and the medical decisions of physicians. The courts also have begun to side with complaints that managed care plans are usurping the prerogatives of physicians and harming patients.

In the public sector, a large fraction of those Medicare beneficiaries who chose to shift to managed care are now back with their standard coverage, either because they were dissatisfied and chose to leave their plans or because plans have terminated their government contracts for lack of profit. The unchecked rise in expenditures on the Medicaid and Medicare programs is causing government to cut back on benefits to patients and on payments to physicians and hospitals. Increased unemployment has reduced the numbers of those covered by job-related insurance and thus has expanded the ranks of the uninsured, which now total more than 41 million people. Reduced payments have caused many physicians to refuse to accept Medicaid patients. Some doctors are even considering whether they want to continue taking new elderly patients into their practices who do not have private Medigap insurance to supplement their Medicare coverage.

Major changes needed

What will the future bring? The present state of affairs cannot continue much longer. The health care system is imploding, and proposals for its rescue will be an important part of the national political debate in the upcoming election year. Most voters want a system that is affordable and yet provides good-quality care for everyone. Some people believe that modest, piecemeal improvements in the existing health care structure can do the job, but that seems unlikely. Major widespread changes will be needed.

Those people who think of health care as primarily an economic commodity, and of the health care system as simply another industry, are inclined to believe in market-based solutions. They suggest that more business competition in the insuring and delivering of medical care, and more consumer involvement in sharing costs and making health care choices, will rein in expenditures and improve the quality of care. However, they also believe that additional government expenditures will be required to cover the poor.

Those people who do not think that market forces can or should control the health care system usually advocate a different kind of reform. They favor a consolidated and universal not-for-profit insurance system. Some believe in funding this system entirely through taxes and others through a combination of taxes and employer and individual contributions. But the essential feature of this idea is that almost all payments should go directly to health care providers rather than to the middlemen and satellite businesses that now live off the health care dollar.

A consolidated insurance system of this kind–sometimes called a single-payer system–could eliminate many of the problems in today’s hodgepodge of a system. However, sustained cost control and the realignment of incentives for physicians with the best interests of their patients will require still further reform in the organization of medical care. Fee-for-service private practice, as well as regulation of physician practices by managed care businesses, will need to be largely replaced by a system in which multispecialty not-for-profit groups of salaried physicians accept risk-free prepayment from the central insurer for the delivery of a defined benefit package of comprehensive care.

Such reform, seemingly utopian now, may eventually gain wide support as the failure of market-based health care services to meet the public’s need becomes increasingly evident, and as the ethical values of the medical profession continue to erode in the rising tide of commercialism.


Arnold S. Relman (), professor of medicine and social medicine emeritus at Harvard Medical School, is the former editor of the New England Journal of Medicine.