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Can the United States provide health care for all?

By Regina Herzlinger

18 May 2009

Of course.

After all, providing universal coverage, at, say, an average cost of $5,000 per person, will cost at most $250 billion annually and likely less because some of the uninsured can afford to pay part of the cost of their health insurance—a quarter earn more than $40,000- and many are lower-cost young people. Two hundred and fifty billion dollars is a large sum, for sure, but not overwhelming relative to the trillions of expenditures in the stimulus bills.

And United States citizens support universal coverage. Buffeted by a recessionary economy and locked into jobs they do not want only because they offer health insurance, Americans increasingly demand affordable access to health care.
So we’ve got the demand. We have an adequate supply of doctors, nurses, and facilities (though perhaps not forever if we continue on our current course). And we can afford a well-structured universal plan. To achieve such a plan, however, we need to impose the discipline of the marketplace so that patients can spend wisely, providers can price services correctly, and we can cut down on waste and inefficiency.

What are the obstacles?

US health care costs are already killing our economy. Prudent people on both the left and the right of the political spectrum worry that universal coverage that further expands these costs may be the final nail in the economy’s coffin.
At 17 percent of GDP, US costs are about 70 percent higher than those of our developed global competitors. The uniquely high proportion of health care funding funneled through employers forces US companies to carry this excess poundage into the global arena, unlike employers in countries that support expenditures through a broader tax base. Many employers, especially smaller ones, do not offer health insurance at attractive rates—a third of those who work for organizations with fewer than 25 employees are uninsured, for example. As a result, the allocation of labor in the economy is distorted by productivity-killing job lock, as employees spurn jobs in these smaller companies, which create about 80 percent of new jobs.

The experience of Massachusetts provides a sobering lesson about the results of expanding universal coverage without paying attention to cost control. As more than 300,000 people gained insurance, costs also increased. Not surprisingly, the number of enrollees who needed subsidies was higher than expected. When the recession hit once wealthy Massachusetts, the increase in health-care costs helped tip the state into a billion-dollar deficit. The Commonwealth is now contemplating cost control through all-payer regulation, in which the state effectively sets the prices for health insurance. If this Massachusetts solution seems like the road to a single-payer system, under which the state government controls all health care expenses, that’s because it is.

There is no question that single-payer systems control health care costs: Canada, in which private payment is virtually illegal , and the United Kingdom, in which most of the funding comes from the government, have substantially lower costs. But do single-payer health care systems achieve cost control in a manner that would be acceptable to the American people?

Single-payer systems control health care costs primarily by rationing services to the 20 percent of the people who account for 80 percent of the costs. The political calculus is cruel but irresistible: 80 percent of the people, the healthy ones, will love their system, while some of the sick, a mere 20 percent, will not. As a result, the United Kingdom has the lowest uptake of new cancer drugs among the Big Five European economies and commensurately low cancer survival statistics. The percentage of people treated for end-stage renal disease in the UK is roughly a third of that in the United States and about 50 percent less than it is in other Organisation for Economic Co-operation and Development (OECD) countries. Lack of treatment is essentially a death sentence because most people cannot afford to pay the high costs of treating these diseases from their own pockets.

The United States may render too much medical care to the sick but the United Kingdom does too little. The Americans who caused the managed-care backlash are unlikely to tolerate this kind of rationing.

Nevertheless, in the United States, Medicare is alleged to be a good cost controller and one that avoids the rationing tactics of the single-payer economies. So how does it achieve this miracle? Give considerable credit to government accounting: Medicare is low cost because the government accountants are permitted to ignore some inconvenient truths: $34 trillion in unfunded liabilities plus $89 billion in underpayments to medical care providers, which are ultimately paid by private insurers. With correct accounting, Medicare’s cost would increase by more than a trillion dollars. Further, if Medicare were the sole US health insurer, it would either increase its payments to providers by $89 billion or the current near-shortage in doctors would reach crisis proportions as medical students and graduates, burdened by huge debts and limited financial prospects, chose other professions.

Although the Democrats tout various other magic bullets for health care cost control—invigorated health care IT, oodles of prevention, miraculous reversions of destructive lifestyles, and centers for measuring relative cost effectiveness, even President Obama’s budget director pooh-poohed their likely impact when he headed the Congressional Budget Office. Most Americans do not believe these miracle solutions will do the job, either. In their eyes, the key to slimming the US health care system lies in eliminating its waste and inefficiencies. After a thorough analysis, McKinsey claimed that plain old inefficiency accounted for about $500 billion of excess US costs relative to other countries, as adjusted for their wealth and other relevant characteristics.

So, can we control health-care costs by slimming down this sector, without rationing care, and thus make health care available to all?

It cannot be that difficult. After all, we have achieved this kind of cure in other sectors of the economy, even for complicated products such as cars and computers. Henry Ford, for example, singlehandedly slashed the price of a car from that of a house to something readily affordable by the middle class. Bill Gates, Gordon Moore, Michael Dell, and Steve Jobs transformed the finicky, volatile $150,000 minicomputers I reluctantly programmed (in a foreign language, Fortran) as an MIT student in the 1960s to the cheap, reliable, user-friendly devices we use today. Service industries have benefitted from productivity too. Another McKinsey study attributed a third of the 1995–1999 surge in US labor productivity and continuing growth through 2002 to retail’s managerial and organizational innovations, such as the new markets created by eBay and Amazon.com and the inexpensive and stylish products offered by IKEA and Target.

There were two key ingredients to these productivity surges: the consumers who bought goods and services that provided better value for the money and the brilliant entrepreneurs who supplied them. The only viable health care cost cure is to reform public policy so that we create a consumer-driven health care market that motivates and rewards productive innovations in supply.

On the demand side, most health insurance beneficiaries do not behave like real consumers: employer-insured consumers are not motivated to shop carefully because they do not recognize that their health insurance benefits are essentially taken from what would otherwise be their wages, and those insured by the government have someone else footing the bill. As a result, consumers do not exercise the normal value-for-the-money judgment that has caused goods and services in other markets to become simultaneously better and cheaper.

When people use their own money to purchase health care, they drive costs down without compromising their health. For example, Switzerland, where health insurance is totally purchased by consumers (the poor and sick are subsidized), has costs that are 40 percent lower than those in the United States, as well as excellent care and universal coverage. Similarly, high-deductible health insurance policies demonstrate that middle-class consumers who pay a meaningful fraction of their health care expenditures out of pocket reduce spending without damaging their health.

On the supply side, providers are compensated for delivering fragments of care by a Medicare payment system that compensates providers for a hospital stay, for example, rather than for all the treatment and followup needed to treat a disease or disability. This payment system is especially problematic for the treatment of chronic diseases and disabilities, which account for 80 percent of health care costs. Because the providers are not motivated to optimize the overall course of care, patients receive suboptimal care that ultimately results in higher costs. The experience of Duke University Medical Center in devising an integrated system of care for the treatment of congestive heart failure is instructive. Although its integrated system reduced costs by 40 percent in only one year, Duke as an institution lost virtually all the savings it generated because it receives substantially higher compensation for treating sick, hospitalized people than for creating improvements in health that keep people out of the hospital in the first place.

Effective cost control would motivate consumers to shop carefully for insurance policies that offer the best value for the money while giving providers incentives to supply the best value for the money. There are two reforms that can make this happen:

1) Reform the income-tax system so that employed enrollees understand that their income funds the purchase of health benefits. The most direct way would be to make the money spent on health insurance available as cash, tax free, to employees. For example, my employer, Harvard University, could offer me a tax-free raise for the $15,000 of my income that it currently spends to purchase my health insurance. Like me, many of Harvard’s employees would opt to take the money and buy their own insurance, creating a genuine consumer-driven market.

2) Insurers would then compete for customers with policies that offer better value for the money. Their most important innovation would be the creation of integrated networks of producers paid for providing the total care needed by victims of chronic diseases and disabilities. (The payment reform would be led by changes in Medicare’s payment formulas.) These networks would offer better and cheaper care because of their integration. Other policies might reward health promotion by offering up to 40 percent rebates—that would amount to $6,000 annually in Massachusetts where a family policy costs $15,000—for enrollees who demonstrated health promoting behaviors, such as smoking cessation or vigorous exercise regimens.

The combination of invigorated supply and demand is the only health care reform plan that will avert the economic disaster that otherwise awaits us and, simultaneously, make health care available to all.

Sadly, it is a solution that the Washington, DC, establishment, which doubts the wisdom of consumers and the competence of entrepreneurs, is most reluctant to effect.

Comment [38]

Agree? Disagree? Let us know what you think. Please include your full name with your comment. Comments may be edited.

I am inclined to beleive that patient co-payments for health care, through deductibles or other forms of cost sharing, are essential to promote rational utilization of health services and medications. Health demand tends to be price-insensitive because it is often related to catostrophic personal crises, because much of the demand is supplier-induced, or at least supplier-influenced, and because most of the cost is paid by third-parties, be it the taxpayer or the employer.
Banks call this client co-payment the security margin: the first loss has to be taken by the client, in order to avoid a sort of unhealthy “moral hazard”.
However, it is important to consider patient life cycles and demographics, since the aged need more health care. This has implications both at the macro level, and at micro level in designing the systems. Most suppliers and insurers do a lot of “cherry picking”, focusing on the client segments and services which are most profitable. The integrated public health systems provide “cradle-to-grave health care”.
Do any of the other types of providers do that?

Posted 20 May 2009, 17:12 by Mariana Abrantes
I believe professor Herzlinger is correct when she says that the cost of Medicare is understated because the government under-pays providers by $89 Billion.

But she is wrong in her assertion that “Similarly, high-deductible health insurance policies demonstrate that middle-class consumers who pay a meaningful fraction of their health care expenditures out of pocket reduce spending without damaging their health.”

The experience of the health system I lead (echoed by many of my colleagues around the nation) is that bad debt is soaring (ours is up over 50% in a year) because individuals with high deductible plans are still seeking the same amount of health care, but many are unwilling or unable to pay their portion. They are behaving just like Medicare. They are getting the services but failing to pay for them.

Posted 20 May 2009, 13:53 by Leo Brideau
Follow the money. If you want to know where you will find opposition to any of the proposals being made regarding health reform, one needs to examine whose pocketbook will be lighter. RH points out that Medicare does as well as it does because it underpays for the services it provides. Providers are obliged to cost shift to other payers or to underwrite Medicare (and Medicaid) through endowments or “charity” care.

RH has been a strong advocate of consumer driven health care for some years now, but the reality is that employers like it because it is an acceptable mechanism to shift health care costs to their employees. Health care “consumers” behave very differently when they are healthy and purchasing insurance than they do when they are ill and require service. That reality is the Achilles heel of CDHP.

There is considerable evidence in the medical literature documenting the inefficiency of the current delivery system. The physician fee-for-service compensation system is translated by practitioners to say “the more I do, the more I make”. This is compounded by the constant message during training that the physician should do everything possible on behalf of the patient regardless of the likelihood of success. We need to change this compensation system. The experiment at Geisinger, recently reported in Health Affairs, dramatically demonstrates that cardiac surgeons will “get it right” the first time when they are reimbursed on a case rate basis and must absorb the costs of readmission and repeat surgery. The Kaiser model is another example of a system in which providers have the incentives to provide effective and efficient care. In addition, patient satisfaction in theses systems is high.

With regard to medical education, every physician needs to be as well trained in epidemiology and biostatistics as she/he is in physiology, pharmacology or anatomy. Only then will they have the knowledge base to apply those concepts to the management of patients.

RH references the Canadian and British health care systems, but not the Dutch system. The Dutch provide every citizen with a level of insurance they have determined to be appropriate and affordable. This is the level of care that is a “health care right”. In addition, they allow their citizenry to purchase additional coverage if they can afford it and want it. Is this a form of rationing? Perhaps. However, the Dutch seem to have been able to face the facts that they are unable to provide every service to every individual regardless of cost or social benefit. Americans are not at that point yet, but will we ever be able to have true health reform if we do not engage in that public debate>

Posted 20 May 2009, 10:57 by Allan B. Goldstein, MD
The crux of the problem, as evident in Duke University Medical Center example, is the payment system which provides little incentive for keeping people healthy and out of hospitals. Payment reforms by insurers rewarding preventive care and disease management by integrated networks will work only if it increases overall profitability of providers. The reason why other sectors have been quick to innovate to offer low cost products is that they benefited directly by doing so. Healthcare providers on the other hand are expected to invest in bringing down cost of services and overall healthcare cost of a patient for the benefit of insurers.

Another key difference between consumerism in other sectors and healthcare is that I as a customer can decide which mobile or soap to buy but it’s my doctor who is the best judge of what treatment I need. I may be a better informed patient compared to yester-years, thanks to internet, but I still trust my physician with critical healthcare decisions. This is why the reform in healthcare cannot be entirely consumer driven. It needs to be aligned with provider’s best interest.

I am not sure what percentage of US population would be comfortable buying their own healthcare insurance with all its fine prints. The lowest cost option may not be the best choice for all. However, motivating individuals to take ownership of their health and adopt healthy lifestyle is a good idea.

Posted 20 May 2009, 06:36 by Seema Pandey
In Canada, our government spends $4,500 per capita a year on conventional health care. An additional $1,500 a year is spent by the individual on “alternative” or “preventative” therapies. We have the longest waiting times for emergency room visits of 7 developed nations, BUT, 88% of Canadians are confident that the level of health care we receive is excellent. That’s the price of universal care.

Our health care is “universal” although there is some variability by region and province. We estimate that our costs will go up as our population ages—44% are over 50 yrs old and control 70% of the wealth so we will be very tempted to privatize some of the care. We look to the USA for the “best” and “worst” case scenarios.

I understand that Intel and Google are very keen to reduce the admin costs of healthcare by creating a universal health care record, much like a banking record. This would be a great first step.

Posted 20 May 2009, 00:02 by Marty Avery
If wastes and inefficiencies are identified in the healthcare system, not only insurance but better healthcare can be provided to all. This should be coupled with health education with emphasis on prevention of diseases. But it may not be easy because of the vested interest of many who want the present healthcare approach to continue as it is raking them lots of cash. This needs strong political will and citizen education. Obviously, the politicians should not share the vested interest. The money is big and hence one can expect lot of resistance to change.
One thing the other countries should learn after the American healthcare experience is that do not copy the American healthcare approach blindly as it is bound to lead to the same disaster America wants to come out of. The American medical technology is great; use it judiciously to save lives.
Dr. Ajay Sati.

Posted 19 May 2009, 22:58 by Dr. Ajay Sati
I worked in the HMO (Health Maintenance Organization) industry when it was in the beginning stages. Most were non-profit and actually seemed, in those days, to care for their members. I saw a drastic change in attitude and focus when they (HMO’s) became for profit. Some of the people I worked with in the industry were basically sales people of the used car caliber. Many I worked with were passionate about the product and providing a new concept in medical plans to their members. If one knew how to maneuver through the system you received great care. Most participants did not care about understanding their benefits therefore did not know how to obtain care when it was needed and bad mouthed the system for their lack of knowledge and the desire to obtain the needed knowledge. Some of these are our leaders of today. One size does not fit all. I believe our bigger crises is the lack of qualified medical providers from this country. We provide some of the best medical schools that no one can afford and if they manage to make it through school, they are in debt for years. This country blew it when for profit became the way to go for HMO’s. Big salaries replaced medical research. Fancy buildings took the place of neighborhood facilities. Foreign doctor’s were hired because their salaries were lower. It was amazing what the executives would discuss while in the presence of a staff assistant or lowly clerk. The attitude became more money for the executives and sales staffs and less for the people who provided the service to the membership. It was a sad day for me when I realized that for profit HMO’s meant less care and concern for the patient (members).More government, rules, and layers of review panels to obtain care is not the way I want to see this country go. As I see it doctors are in business. If they provide a service for a fair dollar value and if they are good they have more patients. Let them run their businesses and keep government and managed care out of it. Agree on a standard of care and let it be priced based on the standard. Provide the patients information regarding the doctor’s outcomes, waiting times, appointment accessibility and let their incomes fall where they may. Lousy service less patients and less income. Great service, more patients and more income. Sounds to simple to work I assume.

Posted 19 May 2009, 19:12 by M. Feuerstein
A country who has apparently made an effort to blend the “best” of all national health care coverages is Taiwan.

I saw a good documentary on TV a few months ago that reviewed 5 different countries National Health Care Plans and the last one reviewed was Taiwan

This is the reference to the NPR show April 2008.
“Taiwan Takes Fast Track to Universal Health Care
by T.R. Reid”

I am sure there was another show more recently.
It would appear they did their homework

We can and MUST TOO!

Posted 19 May 2009, 18:20 by Betty
Any reform effort has to recognize that approximately 5% of the population consumes 50% of the nation’s healthcare resources. These expenditure are primarily on end-of-life care and those with multiple chronic co-morbidities. This fact is not in dispute. What can be debated is the extent to which this reflects “excess” consumption by these two groups (reflecting peculiarly American social values) or, alternatively, that reflects the fact that healthcare providers are not organized to meet the needs of these consumers ,e.g., physicians are organized around practice specialties rather than disease states.

Half the US population spends less than $1,000 per capita annually on healthcare, representing around 3% of total expenditures. The problem is not coverage; it is the distribution of spending.

Posted 19 May 2009, 17:44 by John McCracken
I am a big fan of the Guaranteed HealthCare Access Plan (GHAP) as proposed by Dr. Ezekiel Emanuel and Prof. Victor Fuchs. Briefly, the Plan would have the federal government provide every individual/family with a healthcare certificate, roughly equal in value to the cost of a FEHBP plan, to purchase a qualified health plan, roughly equivalent to the plans offered under the FEHBP. To participate in the program, health plans would be required to offer comprehensive, integrated health care in exchange for the healthcare certificate and would not be allowed to exclude anyone for any reason.

Under GHAP, employer provided health insurance would be eliminated and purchasing decisions would revert to individuals/families. Health plans would have to organize as integrated systems and compete with one another for annual renewals on the basis of outcomes and level of services provided. The system would be paid for through a single, dedicated and universally applied tax; the authors recommend a value added tax.

What we are witnessing in the current reform debate represents tinkering with the current system, not true systemic reform. The discussions are focused on a bottom up approach to containing costs and providing better outcomes for all. It would seem that Medicare has taught us little about the failure of administered prices and performance standards to improve either. What GHAP offers is a ceiling on the national healthcare budget and a means for its equitable distribution, on the one hand, and a competitive framework that forces the system to reign in runaway costs while at the same time improving health outcomes.

It is not as though we do not know how to organize to deliver on these elements. As the Dartmouth Atlas has pointed out, healthcare systems such as Kaizer Permanents, Geisinger, Mayo Clinic and Group Health Cooperative have “figured out how to improve the quality of the care they deliver and simultaneously contain costs, without denying patients needed, effective care.”

Posted 19 May 2009, 17:20 by Bill Blake