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                             Marcia Angell

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

The resurrection of health care as a political issue reflects three
developments. First, after a few years of slowed inflation in the
mid-1990s, health insurance premiums are again rising rapidly, partly due
to soaring prescription drug costs. Second, despite our booming economy,
more than 40 million people are still uninsured (although the number
dropped slightly last year). Third--and most important politically--two
demographic groups with high voter turnouts are demanding that something
be done: Medicare beneficiaries hurting from escalating drug costs and
middle-class employees fed up with the tricks of managed care--truncated
hospital stays, limited choice of doctors, shrinking benefit packages,
seemingly arbitrary denials of coverage, and increasing deductibles and
co-payments. All of this is enough to get the attention of Bush and Gore,
despite the hazards of being drawn into debate about a subject as
mind-numbing and eye-glazing as the American health care system.
But comprehensive reform is thought to be out of the question, given the
general belief that the Clinton plan failed because it was too sweeping.
(I happen to disagree with this view; see Theda Skocpol's Boomerang for
the full story.) Most have drawn the lesson--repeated like a mantra--that
only incremental reforms have any chance of (a) being enacted and (b)
working. Thus, the few reforms since the Clinton debacle have merely
nibbled at the edges. The Kennedy-Kassebaum bill, for example, permits
employees who leave their jobs to continue their health insurance, but is
silent on how they can afford the stratospheric premiums that may be
charged. Similarly, legislation mandating at least 24-hour hospital stays
for childbirth doesn't speak to the general problem of ever-shorter
hospital stays. It is in this spirit that Gore and Bush are gingerly
attempting to address a few of the more glaring inadequacies of our
health care system.

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

An Unhealthy System

There is more than enough money in the system now to give Americans all
the health care they need or could reasonably want--if it were
distributed differently. We spend over $4,000 per capita on personal
health care, about twice as much as Canada and the European countries
(which cover all their citizens), and the gap is growing. Why is our
system such a money sink? Not because our population is older or sicker.
All the Western countries have aging populations vulnerable to nearly the
same illnesses at roughly the same rates, and ours is actually younger
than most. Nor is the reason that we get better outcomes. By all the
usual measures of health--life expectancy, infant mortality, childhood
immunization rate--we do worse than most Western countries. The only
plausible explanation is how health care is financed and delivered. The
American health care system is staggeringly wasteful and inflationary.
The United States is unique in treating health care as a market commodity
distributed according to the ability to pay instead of as a social good
distributed according to medical need. The fact that the system targets
market transactions, not medical need, is highly inefficient because it
requires constant tinkering to deal with the inevitable result: People
who cannot pay still get sick and need to be taken care of.
Although health care is treated like a commodity, it is not traded in
anything like a classical market. For one thing, it is largely paid for
by third parties, not consumers themselves. Government foots about half
the bill for personal health care, and employers about a third.
Furthermore, health care is not a discretionary desire, like VCRs and
computers. Someone with a brain tumor, for example, is not disposed to
shop around for a low-priced neurosurgeon or to postpone the purchase
until the kids graduate from college. Patients are dependent on their
doctors' judgments as to whether and when they need care and what kind
they need. The health care business, then, is highly protected from the
usual market constraints, and the tug of war between doctors and insurers
adds more inefficiency than it constrains costs.

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

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

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

The Clinton Plan and Its Aftermath

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

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

For a few years in the mid-1990s, managed care seemed to work. That is,
inflation in employers' health care costs was greatly slowed. (It was a
somewhat different matter for employees, who found themselves picking up
costs for more bits and pieces of their medical care.) But even though
managed care worked, it did so with extraordinary inefficiency. Managed
care companies regularly skim off a substantial amount of their premiums,
somewhere between 10 and 30 percent, for administrative costs, marketing,
and profits. Some of the rest is diverted to other businesses only
indirectly related to health care that have entered the increasingly
entrepreneurial health care market. These include brokers to cut deals,
physician-management companies, companies to coordinate the care of
specific illnesses, billing agencies, marketing consultants,
information-management firms, and on and on. They, too, skim off their
overhead costs and profits. Ultimately, only about half of the health
care dollar makes its way to the doctors and hospitals that actually
provide care, and they, too, have high overhead costs as a result of
having to deal with multiple payers with different rules. (It is hard to
understand how anyone familiar with the health care system can still
believe in the myth of the greater efficiency of the private sector.)
Medicare is by far the most efficient and popular part of our health care
system (with overhead costs of about 2 percent). Nevertheless, its costs
are rising at an unsustainable rate because of the aging of the
population and problems that stem in part from the fact that the program
is embedded in the larger profit-driven system. In addition, doctors are
paid fee for service, and despite some efforts to correct the problem,
the fee schedule still preferentially rewards high-technology care
delivered by specialists.

The Incremental Reforms of Bush and Gore

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

Prescription Drug Benefits. Both Bush and Gore have offered incremental
proposals to help Medicare beneficiaries with drug costs and also to
mollify younger voters who worry that the program will be gutted by the
time they are 65. The fact that Medicare does not cover outpatient drugs
is an anachronism; when the program was crafted in 1965, drugs were cheap
and there weren't as many. Now seniors are vulnerable to the rapidly
escalating prices of the growing number of effective drugs on the market.
Bush and Gore would have Medicare directly pay for all out-of-pocket drug
costs above a certain level ($6,000 for Bush and $4,000 for Gore) and
also for the drug costs of low-income seniors (Bush would begin with
four-year block grants to the states for this purpose). Both candidates
would pay for their proposals with a portion of the budget surplus plus
increased premiums for beneficiaries, but not with an increase in the
payroll tax that provides most of the funding for Medicare.
But here the similarities end. Bush would rely heavily on funneling
subsidies through private insurers and managed care companies. He would
encourage health plans to compete for seniors on the basis of price and
choice of benefits, which would include the option of drug coverage.
Medicare would pay at least 25 percent of the premiums for drug coverage,
which would be set by the market, as would deductibles and co-payments.
(Bush would add a drug benefit to the traditional Medicare program, but
he is vague about who would be eligible for that or what the terms would
be.) In contrast, Gore would rely on expanding federal programs or
creating new ones. He would offer an optional drug benefit within the
Medicare program for a premium starting at $25 per month. Under this
benefit, seniors would receive 50 percent of their drug costs up to a
ceiling of a few thousand dollars.

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

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

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

Coverage for the Uninsured. Bush's proposal for covering the uninsured
would provide tax credits of up to $2,000 per family to purchase private
insurance (which would be paid in cash if the family does not pay that
much income tax). But $2,000 would constitute less than half the cost of
insurance for a family of four, and poor people could not afford to
participate. Gore's approach to covering the uninsured is to make sure
all eligible children are enrolled in Medicaid or the new state-run
Children's Health Insurance Program (CHIP) for uninsured children.
Eventually he would expand CHIP to cover the parents of children enrolled
in it. Gore also favors permitting adults between ages 55 and 65 to buy
into Medicare and giving them a tax credit on part of the premium.
Gore's reliance on CHIP underscores one of the most distressing aspects
of our byzantine system: Even those who are eligible for coverage often
don't get it. A recent survey showed that most parents of children who
may qualify for Medicaid or CHIP are not even aware of it. The states
have been so desultory in enrolling children in CHIP that most eligible
children are not participating, and 40 states are now facing the prospect
of returning the $1.9 billion in federal funds they received for the
program. (Needless to say, they're objecting.) New York is dropping many
of the children it did enroll because they should have been on Medicaid
instead.

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

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

A Different Incrementalism

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

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

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

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

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

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Copyright (C) 2000 by The American Prospect, Inc. Preferred Citation:
Marcia Angell, "Placebo Politics," The American Prospect vol. 11 no. 23,
November 6, 2000.This article may not be resold, reprinted, or
redistributed for compensation of any kind without prior written
permission from the author. Direct questions about permissions to
permissions@prospect.org.