Healthcare Reform Paper Fall1994

ealth

care

reform:

a

free

market

perspective

JEfTREY

S.

FLIER,

MD,

AND

ELEFTHERIA

MAR/\TOS-FUloR,

MD

Problems

with

the

U.S.

health care

system have

been

topics

o[

discussion

for

many

years.

Escalating

e x p e n d i t u r c ~

onhealth and increased

numbers

of

uninsured

individuals

are

generally

accepted

as

the

major symptoms

of

these

defects.

Healthcare reform

became paramount

among

social

policyissues

during

the

presidential

campaign

oflll91,

and

in

early

IlI!)3,

Hillary

Rodham

Clinton

was

appointed

to

head

a

taskforce

charge

I With

preparing

legislative

proposals designed

to resolve the

crisis.

The

task

force

met

mostly in

secret [or months, and

in

September

1993

the

WhiteHouse

released proposals

for

unprecedented

change

in

the trillion-dollarhealth care

industry.

The dominant theme of

this

complex

legislation

involved

increased regulation

and control

of

the medical

and

insurance

industries.

The

intense and broad-based

discussions

of thenature

of

the

problem

and the

merits

of

the

specific legislation,

as well as

alternative

approaches.

The

initial

debate

focused on

both

cost

and

access; however,

over time

the

focus

shifted

toassuringuniversalcover

age.

The dominant theme

of proposed

legislation was to

introduce

sweeping

new

regulations

and

taxes.

Cost estimates

of

theproposedplans

weredisputed, and

no

consensus could

be

reached regarding

basic

aspects

of

the

legislation.

The attempt

to

produce

legislation

in

1994

has largely

been

abandoned,and

the

focus

hasnarrowed

to

incremental

reform.However,the

basic

premise

of

leading

proponcnts of

refurm,

thatimprovements

in

the

healthcare

system

can

be

accomplisheJ

by

government

regulation,remains

unchanged.

We

present

this

paper

froman

alternative perspective that

vicws

symptoms

of

cost

and

access

as

resulting

to a

substantialdegree

fromdecades

of

flawed

public

policy,

rather

than government

inaction.However

well

intentioned,

prior

policies

have

causedeconomicdistortions

that

raised the

cost

of

medical

care

and

reduced

the

availability

of

affordable insurance

for a

majority

of

the population.

hom

this

perspec

tive,

further regulation

is likely

to

exacerbate more problemsthan

it willsolve,

bringing

relief to

some

individuals while

reducing

availability

to

From

tl1e

Department or Medicine U.S.F.). Beth

lSI

el

Hospital.Boston.

the

Department or

Meel,clnc(E.M.·F.). Brigham & Women's Hospital nd Res arch Division. Joslin Dt

betes

C

nler.

Boston: and

tl1e

Departnlcnl

of MediCine (JS.F. and E.M.·F.), Harvard

Medical

SchOol. SoslDn. M

~ s < ' C n u s ~ e l l s

Address correspondence and

rep"nt

requests

to Jeffrey S. Filer. MD,

6eth

Isro I Hospital.

3::10

Brookline

Ave..

80';ton.

MA

0221

H

0,

heall

m

InlenanCe org

nI7'1tlon; GIlP.

gr

ss

dOlTIes

II,;

proch,"!:

IRA.

Ind,vtd\l"

rellt""'''''l

account

Problems

with inflation

of

medicalcosts

and

inCI'eased

numbers

of

uninsured

individuals

have

resulted

in

widespread

calls for reform

of

the

U.S.

health

care

system.

Proposed

refor'ms have generally

emphasized increased

regulation of

the

medical

and insuranceindustries, but disputes

over thecost

and

consequences of these

proposal has

so

far

prevented

legislation

fmID

being passed.

This

paper' is pr'esentcd from

analternative

perspective

that

views

the

current

symptoms

on cost

and

access

as

theresults

of

decades ofHawed

public

policy,

rather

thangovemment

inaclion.

Wc

lracethe

originsof

dysfunclional hcalth carc

markcts

in

prior

public

policy,

andoutline anapproach

to

healing

the

heallh care

system

based

on a new

dedication

to frec

market

principles

and

individual

choice.

DIABETES REVIEWS,

Volume

2,

Number 4, Fall

1994

_ 51)

I

------

-

TI18

free market

and

IlealUl

care rcrarnl

manyothers

of

the healtl1 care

they

desire,

This

p<ll'erreViews

scveral

aspects

01

the

rel'llil1nship hetwcellcurrenlprohlems

and

pasl

puhlie

pll!JCy

and

lllltiines

,In

numher

of

possible

solutil1ns hilsed

on

free m<ll'ket

principles

<lnd

imliviuu,i1choice,

IS

A

FREE

MARKET

FOR

MEDICINE

POSSIBLE?

A

free

milrket

is

chM<leterizecJ

Iw

v()IUnl<lry

Ir<lI1S<lC'

ll()ns

hetween

hu)'ers

<I

III

I sellers,

protecled

hy

,!.:()\'-

ernmenl

from

i

mposi

tlon

of

force

'1f1d

(r(liid

(I,))

M,nket

pMadlgmsvary

f!"llm this

pure(ilfld currClllly

r;tre)

form,

along

<I

conlinuum

tl1wind

SOCliillsnl,

1f1

which

u:ntriil

<lutlltJrities

attempl

10

ascerl'lin

theneeds

of

the

citil.ens

<lnd

pruvlde

meChMlISI11S

In

tended

to satisfv those needs,

rhc

Americ;ln

syslem

loday involves

il

mixture

of

m,nkels

and

legul<ltil1n

It

is

important

to

determine whether

thc defects

in

our

health

carc system ;He the

result

111

failures

l1f mM!-;ets

or

f<lilures

111

regulation, The

cJominal1t

view

among

hCillth

economists

IS

th;ll

ddects

in

the

11e,i11.11

caresystcm ;He due

primarily

tu

lclilures

l1f the

market

Clll11pOnent, ,Ind

some

intluentl<ll

aUlhoJ'lties

view

ellcclivc'

medical

markets

as,

In

principle,

impossihle'

("

::;),

These impOrl',1nt

claims

rest

011

\11'0

<lrgumel'lts,the

claim

of

a

uniquc

value

of

mnlic,i1 c,nc,

il11d

anunhricJp.eahlc

Information

gap hetween

p,1Ilent

<lIHI

provider,

These

<lttrihules arc

said

to

produc'e

"fTl<ll'

kel

f,lIlure,"

<I

slale

of

SUbuplil11,iI proCIUCl'IUIl

<l11l1

distribution

ul

services, lh<lt JUstlrles gU\'CI'lll1lelll

111-

tervenllon

to

restore

"c1liciency,"

Is

thc'

vicwthal

rneche<d

sCl'vices

(m

hedlh

Ilsell)

arc

inherently more

valuahle

thal1 uthCl'

goods,

serviccs, and goals

valid')

Wc

find

thaI.

as

judged

hv

their

<tClu,l! choices

and

aClions,

people

do

l10t

;i11

place

lhe

samc value

011

he;l!th,

M,lny

pcorlc

.icllp<lrdizc

he;l!lh

hy

smoking,

unhe,tlthy

diels,

dallgerous

l1llhhies,

or

unsilfc

sc:-;,

It

is

acknowledged thdl

Iikstl'le

change'Shave a

grcater impact

on

health

th<ln

mallY

itllvanecs

in

mediCil1

technolugy

(Il),

An importalll

elhie,tI

poinl

emerges

(rul11

these Llcts,

AnI'

hc,tlth

reformlhal

Imposes milnd<ttes

andgloh;d budgets ,Inll

<ltll'l11ptS

totreat

,ill

individuals

(IS

though

they

v,due

heil![h

equidly

wiJl

almost

certail1ly

m,lke

it clllTicult

1m

[llUSe

who

value hC;l\th

most

to

ohtain

the

CMe

they desireSimililf'ly,

"lnlormationidll1eljuillity"

is

Ilotunique

to

medicine,

M,nly

other

tl'alles ,ll1d IHlll'c:ssions rc'semble mediCine

ill

heing tcehnic,dlv

uhscul-e

to

the

1,\)'111(111

Furthermore

so

Inc

governmellt

aetiolls,

such

as

banning

physici,1I1

advertising

(7),

and

ileting tlllimit eMly

establishment

of

prep<lid heillth-e<lre

SI'S

[ems

(S,I)),

!1<l\('

limilccl

inlonnation

now

Despile

government rn;ldhlocks

to

II1lorm,ltioll,

mill'ke't

,ldapliltlllllS

to

imperfect

information

have

evulved

over

thc

past

.Ill

yeMs,

enelJuraging

increaseJ

p,llicnt

,lutO!lOl11y

,llld

Cl1l1sensual

doctor-patient

reLltll1l1slnps,

These

illclude

publiC diseussil1n l1ll11edi

Gil

Inl1lw,llions,

Incrcdsillg

expectations regarding

illlol'l11ed

((Inselll. ilnd

increased scrutiny

01

physlci,ln

services

by

11C,lllh

m,lintellailec

organizations

(I

HvlUs)

dl1ll

Illsurers, These

adapt'ltiolls l'lluld

be

strell,illhclled

in

,I

more

ulll1pellllve

allcJ

decentralized

l11<1rkelpl,lcL'

<lllclwOlild,

we

believe,

illere<lsnl,illy rCIl

dn

lhe concepl

or

physlcidn-indlleed

demand out

nwded,

or

dl

!cdSI

nol

subslanti,t1ly ditrerL'1l1 I'rom

[lie

si!udtioll

Ih<tt

exisls

ill

olher

SCIVlec nl<lrkels,

AIHlther

drgUf11eni

dg;linslmedical

I1lMkets

(51

IS

t

hd

I cost

consciousness

,1

nd

i

udgmcn

I

;11'<:

necess,lrilylin1l1L'd durJl1g illness,

Althoughcen,lIlllv

lrue

IIIc:-;llcme Cilses,

mallY

medical encuuntcrs

du

noloccur

,tt times

01'

inc,lp;lcily, exlreme

dlslress,

or

even i1lncss

Indced,

keydecisionsilboUl insurance

ilnd

choice ul'

provide

I

itrC lypic;t1ly l11ilde

when

ile,t1thv,

M;lny

medic;i1

CIlCOllillns

"IHJ

pruccdures me

elective,

Im

pOrt"11tlv, d

market suhstdntliilly

responsive

lu

cosl

C'lll1sciollsncs,s doesl1"

lelJuire equdl

cost senSitivity

of

,ill

encounters,

Sume ,Irglle

th"t

cust conscillusness

m,lV

Ie<td

to

UlI1Slll11C1'S

ehollSill,il

to

save

muncy

bv aVllicJing Cilre,

with

tbe I-esult

helllg

aVllidilblc

mediccil h,tr1n,

While

this

posSlhility

cert<llnly

exists, It par;i1lels

Illany

otllers

ill

d

libn,i1

Sl)C1etv

(I

(I),

wherc individuals

l11itke

Inlp(1I1;1llt deciSions

regilrding

CClreel-,

IHlusing, rel,,

lionshlps,

etc

..

despitc widelv

Vill-Ylllg levels

llf

judg

11K'ill

dllli

t'-0od sellse dnc! the

evn-presellt

plllential

ut

nrnr

alldharm,

It

I11dy

be possible

to

limit

choice

<lml

lherl'tore

10

prevcnt harmful

ou[comes, Wehelieve thaI

any

bcnefits

of

such

elforts

arc

out

IVclghed

by

(he loss

of

personal

autonumy

and

the

hdrmflll,

iluninlended,

elfects

of

hureauC!"atiDilion

M;lfket

"iml1l:rleelions,"

even when they exist.

1I1;IY

nul

he

remedlc'll

by guverlll11enl

inlervenlion,Regula[ors

possess (,Ir less

than perl'cct knowledge,

F;ICls

lhemselves,

cunsequenees

or

the

regulalory

deciSions,

ami

the

adu,i1

deSires

of

the

citizens beingreglll<lled

milV

nol

be re(1dily

knowable,

For

these

and

ulher

re(1suns,

m,ln)'

elruns

10

enhance

quality

or

reduce

costs

thlough

regu!;Jlion

,Ire

l101ed

to

!';liI,

or

even

to

produce

the

opposite

results

(I

J),

Regulatluns

Ivpie(1lly

hinder

developmenl

of

ellicienl

111;lr

kels,

<I'HI

there

is

a

duclll11ented

tendency fur

lhe

inlel'ests

ul' the

regulated

tu

end upbeing

pl(1ced

"huvc

t

110se

of

Ull1SUl11ers (12),

Both

l11ilrkc,ts

ilnd

I

cgul"tiulls

eiln ['ilil,

tile

eOllsequences

of

thc

!,ltter

itl'eultel1

l)Jufollllll. Indeed,

we

believe that

the

cunell!

prublel11s

of

e()st

and

,Iecess have

theil' roots

in

pastpubliC

pOliCY,

DIABETES

REVIEWS,

Volume

2,

Numb", :\.

Fall

1994

Flier

anel

Maratos

Flier

SOME

HISTORICAL

ROOTS OF

THE

PROBLEMS

OF

COST

AND

ACCESS

It

is

frequently

asserted that the U.S

he,tlth

caresystem spends

an

excessive

fraction

of

gmss

domestic

product (CJDP) on health.

Although

thc

I

IS.

spends

,I

greater

fraction

of

GOP

on

health

than any

other

country, the

unaceepwbility

of

the

14

r

/r,

of

GT

P spenton heallh care

is

not

self-evident. People in

,lmuellt

societies

will

spend

moreforinnovative

and etfeetivediagnostics and therapies.

An

a,

mg

population

,tlsoIllereaSes

hCC1lth

expenditures.

M,lny other

factms

have been discussed (13).

While

the fact

th,lt

medie<tIexpenditures in the

US.

arc

higher

than

other

Cl1un-

tries

is

partially

explainable. the

r ~ l t e

of

incrcase

SillCC

the mid-llJ(jOs appears to have exceeded

[hal

expected from newly avail,lblc

tcehnology

and

demo

graphics alone.

Why did

this occur') A

nlajm

factm

was

public policy that

promotcd

tirst

dollar

(,llldlowdeductiblc)

insurance and cost-plus

reimbursement.

both

01

which

undermined marketcost-contalilment

mechanisms

by

exceSSively

shielding

111()St

consumers

from exposure

[0

or

even

knowledge

of

the actual cost

of

medical care (14).

Cost-Plus

Cost-plus hospital

reimnursement

(full

cost plus asmall

additional

payment).

initially

en<tctl'll by

1

he

Blue Cross system

during

the IlJ30s

(0).

discour<tgedfinancial responsibility (14).

Originally

the

Blue ('ross

approach included no

co-payments

or

deduc:tibles,

an

open panel

of

physicians and hospitals,

~ \ n d

the

direct

compensation

of

providers

b.

the

insurer.

Cost-plus

relmnursement

evolved

as

the Blue.' rose to

promi

nence, assisted,

not

surprisingly,

by <lilies in org,ll1ized

medicine

(i.e., the

Amc

rica n Meci ical

Assoeiallon)

and the

hospit'll

Industry.

Cost-plus

served the

Inter

ests

of

providers

over

the goal

of

providing

maXimally

affordable coverRge for consumers.

It

is

import<tnt torealize that this

odd

outcome

was

not

the result

of

,I

market

failure.

The

Blues success rL'l[uired

explicit

legislat\on and tax policies

Llvuring

them

over

com

petitors

UU5).

The establishment

of

Medicare/

Medicaid institutionalized

the usc

of

tllC cost-plus

reimbursement

system in

1%5, apparently

to gain

support

of

the hospital

Industry

This

public

pOliCY

contributedpowerfully

to the explosive Incre,lSe Inmedlc'll expenditures that ensued.

Although

many

individuals

enjoyed

benefits I'romthe services

provided

under

cost-plus,

it

is

now widely

<leknowledgcd that this

mode

of

financing

accelerated

per

eapitil spending on

health

care

beyond

what

most

inrJividu<l[s

would

have chosen

ir

splllding

their

OWII

money.

Over

the P(lst

20

years,

efforts

to

limit

thecost-plus system

throughregulations

like ccrtilicatL:s

llf

need (14,J(J) and IJhysicialls' Standards Review

Organizations

(PSROs),

designed to

eliminate

"un

nL:cess<lry" ('<Ire,

were

tried

and failed (17).

[n

Medi

care.

diagnostic-related

grollps

wcrc

initiated

to

moddy

cost-plll.s (10).

In

contrast

to these generilJlyunsuccessful

efforts

to

hold

down

costs

through

reg1Ildtion,

marketsdidrespond

thll1ugh many adapta

tions,

Including

entrepreneurial

efforts

such

as

outpatient

surgery centers

and

free-st'lnding emer

gency facilities,

as

well

as

the rise

of

managed

Care.

Actually,

the

10:)Os

markcd

lhe

rccf1lcq.'.ellee

of

eOI1l-

petitivemedicalmarkets

<llld

nwder'ation

of

the

nlte

of

nK'died

inflation

appe<lrs

10

ILlve begun (10).

First Dollar Coverage

In

the

early

20th

centurv,

health

Insurance covered

Glt,lstrophie

ami

chn)nic

Illness (:)).

Routine

care

was

p'\Il1

out

of

pocket.

Since the !040s

puhlle

policy

stimulated

health insurance

to evolve

toward

<I

radically

dilkrent

system

that, in

addition

to

covering

ealastrophie

illness, covers even small expenditurL:s.

What

caused this change in the <lppmach

to

insur

ance') hen wage and

price controls

were

instituted

during

World

War[I,govelllment

allowed

"fringehenehts"

[0

Incre,lse

as

s<darv

substitutes (20),

thereby

pll1moting

purch,\se

of

health benefits

by

employers.

I . ~ v e n

;Ifter price

control,

ended,

employ

er-provided he,l!lh

covcragc

w,\s

granted

t<lX

exemptstatus, and

tllis

lurther

stimul<lted the

substitution

of

tax L'xempt

medical

care

for

taxablc wages (2lJ).

Although

it m<llle sense

tor

an individu<ll to seek

"Iow

deductihle"

hrst

dollm

coverage given the ,lVilil,lble

options,

tirst

dulldr

coverage

is

more

costly and

inelliclenl

th,ln

true

insur'lI1ee. Since the insured

rarely

spend

their

own

doll'lrs.

this

~ \ p p r o a c h

r'emoves

~ l n y

Incentive

for

cost-conscious medie<d

consumption

and.

over

ln11e,

eusts rise.

In

addition.

the Illany small

C I ~ I I I 1 1 S

tlwt

dre covercel by insurdnce

r,\ther

than

out

of

pocket are,

relati\cly

speaking, the most expcnsiveto process. and the

overall administrative

cost

of

proccsslng such

small claims

increases cost

infbtion.

Tax

suhsidies

al\'

at the

ruot

of

this

demand

for

nrst

dullal

cover;lgc.

Without

tax subsiciy,

more individu

als

would

instead

choose

high

deductible.

eatd

slluphie

Insurance

policies.

as

tllese

<Ire

far

less

expensivc than

low

deductible

or

first

dollar

policics.III

s U l T 1 m ~ \ I Y ,

t<lX

Incentives pushed the U.S. toward

what

is

predominantly

dT1

employer-based,

third

pdrty-fin,lI1cL:(I, I()\v

deductihle

insurance system.

Consumers

vs.

Payers

The

incentives discusseu above resulted in a

f,lllingfraction

of

health

carl' expenditures

paid

for

dlreCllv

- . 1 ~

IABETES REVIEWS,

Volume 2, Number 4, Fall

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Healthcare Reform Paper Fall1994

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