The Health Care Crisis: A Prescription For Reform

There are a thousand agendas in Washington, but if any issue dominates the lists, it is health care reform. After countless years of neglect, its time has come. The cries from employers beleaguered by soaring costs have reached a crescendo that politicians dare not ignore. Those cries are matched by the rage of more and more working Americans as they helplessly watch their coverage dwindle, or even disappear. The result: an overhaul of the health care system looms as a major--maybe the major--issue of 1992.

The political climate is ripe for action because reform has become just as crucial to the middle class as to the poor. Contrary to popular belief, the ranks of the uninsured are not dominated by welfare recipients or deadbeats: More than 85% of the 33 million uninsured Americans are workers or their dependents. Middle-class Americans consider affordable medical care a fourth inalienable right, up there with life, liberty, and the pursuit of happiness. But these days, even those used to the best health insurance are uneasy. Employees who not so long ago had all-expenses-paid coverage are now shelling out for premiums, deductibles, and copayments. Some companies are dropping coverage altogether as premiums go sky high. Some insurers also are refusing to cover people with serious illnesses such as diabetes or AIDS, or those who want experimental therapies and drugs.

If that's not enough to give you a migraine, the future looks even worse. Medical spending in the year 2000 is expected to reach nearly $1 trillion--15% of gross national product--compared with an already dizzying $676 billion today, or 12% of GNP.

If the system is left to its own devices, the vicious cycle of rising costs and declining coverage will intensify. As the ranks of uninsured grow, hospitals and physicians will continue making up for unpaid bills by charging employers more. They, in turn, will keep shifting more costs on to workers or drop coverage altogether. Employers will also squeeze payments to hospitals and other care providers, who will then be less able to provide free care to the uninsured. That, in turn, will further swell the numbers of those unable to obtain care. And the rising numbers of uninsured in turn threaten treatment for everyone: Demand for uncompensated care is already forcing hospital trauma-care units and emergency rooms to close, leaving the rich as well as the poor without service.

Dorvatives (box, page 60). None of them offers a magic elixir that can cure overnight the health care system's ills.

BUSINESS WEEK, though, believes the best remedy is a variation on the "managed competition" theme first developed by Alain C. Enthoven, a professor at Stanford University's Graduate School of Business, and Richard Kronick, professor of health care financing at the University of California at San Diego. Enhancing the clout of major public and private purchasers of health care, the plan would change the way employers buy coverage and the way medical treatment is delivered. "Health care has been dominated by the supply side," Enthoven says. "We need to strengthen the power of the purchasing side." Just as important, managed competition would be more politically feasible than most other proposals because it would retain most existing institutions such as the employer-based insurance system.

STRIKING A BALANCE. Under managed competition, all employers, both large and small, would be required to provide health benefits to employees. But small businesses would no longer buy coverage from insurers. Instead, they would be required to pay into a regional health care purchasing corporation, a government-sponsored entity that would function as a super insurance broker. This corporation would negotiate the purchase of various kinds of health care plans from competing managed-care companies, whose services would include both health maintenance organizations and networks of independent doctors and hospitals. An individual employee would then select one of the options.

The managed-competition approach strikes a reasonable balance between free enterprise and government regulation. It includes a strong government role to mandate minimum coverage and set price and quality standards. But it's also market-oriented. It will enhance competition by giving more market power to individuals and small companies, allowing them to get a better deal from health care providers. It will make the system more efficient by eliminating hundreds of small insurers, who tend to push up the system's administrative costs.

The health care market currently contains none of the self-correcting mechanisms that work to curb excesses in normal markets. While competition among sellers usually drives prices down, an oversupply of physicians and hospitals rarely makes a dent in costs. The reason: Patients have a hard time judging the care they buy, and insurance insulates them from the expense. A seller couldn't hope for a better customer. Doctors have enormous discretion in deciding the type and cost of the care they order. They also have the incentive to overtreat, since most get paid for each procedure performed. The result, Rand Corp. estimates, is that 30% of all health care--from tests to surgery to drugs--is unnecessary.

The same goes for hospitals. Since the early 1980s, when medicare started forcing hospitals to discharge patients after a certain period, hospitals have tried to recoup income by becoming full-service centers. Today, it's not unusual to see several fully equipped open-heart surgery centers in one small city, for example. To attract doctors with well-heeled patients, hospitals gobble up the latest equipment. That high-gloss medical technology accounts for half of the rise in the nation's annual health care bill.

COSTLY CHOICE. No one is arguing that technologil innovation should slow down. The problem is, the costs of the new treatments often don't decline as they become more common--because no one has the incentive to lower them. For example, a study by Metropmlitan Life Insurance Co. found that thgie number of coronary bypasses nearly doubled from 1981 to 1986, while the charges per procedure rose about 50%, from $21,800 to $30,430.

There also is significant evidence that physicians tend to use the glitzier technology even when a less expensive alternative will do just as well. A growing body of research shows that patient expectations, physician's hunches, and local medical custom are more likely to influence a physician's practice pattern than empirical evidence of a treatment's effectiveness. Landmark research on medical practices by Dr. John H. Wennberg of Dartmouth Medical School, for example, found that Boston residents were twice as likely as people in New Haven to undergo carotid endarterectomies, a $9,000 procedure that cuts fatty deposits from neck arteries. Yet there was no difference in how patients in the two cities fared in the long-term.

The trick is to create a system that offers doctors and hospitals an incentive to squeeze out waste without stifling technological advances or individual initiative--or harming the patient's care. Here's how BUSINESS WEEK's version of managed competition would work:

COVERING EVERYONE. Today, most employees get their health coverage at the workplace, and the BUSINESS WEEK proposal would build on that system. All employers with more than 100 employees would be required to cover their workers--as 82% of companies this size do now. Small companies would face a more drastic change: All businesses with fewer than 100 workers (including part-timers) would pay a payroll tax, with a surcharge based on the company's profitability, to a health care purchasing corporation, a regional nonprofit agency set up by the state. This corporation would buy coverage for these companies. Medicaid would cover only the unemployed poor, and medicare would keep serving the elderly. Those not covered by public or private plans, such as the self-employed, could buy insurance directly from the corporation. Tax credits would ease the burden for those with low incomes.

The result: universal coverage. This would boost the national health care tab. Some estimates say covering the uninsured could add $15 billion annually. But in the long run, the increase may not be as great as some fear. Today, the uninsured rarely receive primary care and usually wait until their condition reaches the emergency stage, with higher costs and worse prognoses. Inexpensive prenatal care, for instance, could reduce the likelihood of low-weight babies, for whom care can cost $70,000. Employers, who have had to absorb the cost of care hospitals provide the uninsured, may even see their bills decline.

MORE CLOUT. Little companies are losers in the insurance market. Though they employ 58% of all private-sector workers, they have little market power. Traditionally, insurers based premiums on the average cost of care used by all subscribers in a community. But then big companies started to use their size to negotiate cut-rate deals with insurers. Those who had relatively healthy work forces found it was often cheaper to self-insure. The result: The rates charged small companies soared. Their average annual health care cost per employee has risen to $3,100 today from less than $2,000 in 1986, according to the National Federation of Independent Business, a trade group. It was even worse for small companies with seriously ill employees, whose policies were often canceled. Many small employers have even stopped providing insurance to employees.

Under this proposal, says Stanford's Enthoven, who devised the purchasing corporation idea, small businesses would have the same access to reasonably priced coverage as big business. The employer would pay a purchasing corporation, which would solicit bids from large "organized delivery systems," managed-care networks that meet federal cost management and quality control standards. The purchasing brokers would be able to negotiate contracts at far lower costs than the small employers could win individually. Currently, "the guy who runs the doughnut shop can't do that," says health policy consultant Lynn Etheredge, a supporter of managed competition.

The purchasing corporation would choose perhaps 10 systems in a community based on data from the organized delivery systems on the quality of the care that they offer. Individual employees would then select a plan. The corporation would pay the health care provider a standard fee for all the treatment the individual would need. Individuals would get all their care from that system; if they went outside the network, it would be at their own expense. Medicaid could also decide to buy its health care from the corporation. Large employers would negotiate with the organized delivery system on their own.

The federal government would set minimum benefits that all plans must offer. A basic package would likely include preventive care such as well-baby exams and mammograms as well as all hospitalization. The employee would pay 20% of the cost of the basic package. Employees who opt for a richer benefit package--with, say, coverage for plastic surgery or private hospital rooms--would pay higher premiums.

Some experiments along these lines are already under way, and the results have left some experts optimistic. In Cleveland, the Council of Small Enterprises (COSE) under the umbrella of the Chamber of Commerce, buys insurance for 8,000 small firms. During the last seven years, health insurance costs for COSE companies rose 46%, compared with 176% for other small companies.

GREATER INCENTIVES. Most medical care today is delivered haphazardly. Providers operate independently, without answering to anyone for costs and results. Numerous studies, such as Wennberg's, indicate that a large amount of health care is medically unjustifiable.

Competitive forces combined with government standards would inject more efficiency into the delivery of care. Each patient in an organized delivery system would have a "gatekeeper," usually an internist who would direct patients to specialists as the need arises. The gatekeeper would be responsible for calling in the patient for immunizations, checkups, and pap smears. Serious cases would be assigned a case manager, who would see that appropriate services are provided. "There won't be the hit-and-miss health care we have now," says Dr. Mary Jane England, president of the Washington Business Group on Health.

If this sounds a little familiar, it should: Forerunners to these systems already exist, such as health-maintenance organizations including Kaiser Permanente Health Care Program and Harvard Community Health Plan. Managed-care networks operated by such large insurance companies as Prudential Insurance Co. of America, CIGNA, and BlueCross & Blue Shield also are fledgling examples.

PEER REVIEW. But the organized delivery system would do much more. Most managed-care systems today sign up any doctor willing to offer fee discounts. Tomorrow's systems would sign up only those providers who meet rigorous quality standards, using board certification, malpractice history, and a review of treatment patterns as criteria. They would scrutinize gatekeepers' performance, disseminate state-of-the-art clinical guidelines on treatments, and see to it that doctors stick to them. Training and peer review will be common. The goal would be improving the system's overall quality rather than micromanaging each medical transaction for every patient, as insurer "utilization reviews" do now.

A system could own some of the facilities that provide care, but it could also send patients to "center of excellence" facilities for specific procedures--hospitals that have proven high rates of success. Data comparing hospital and physician outcomes already are being developed. A recent study of 3,055 coronary artery bypass grafts performed at five New England hospitals by 18 different surgeons found that patients were twice as likely to die at certain hospitals and four times as likely with certain doctors.

Large corporations, led by the Washington Business Group on Health, are pushing the idea of the organized delivery system. "We are in the earliest stages of building these systems," says Dr. Jacque J. Sokolov, medical director of Southern California Edison Co., which has set up its own network--a model for a system of the future. SCE's HealthFlex makes use of 85 hospitals, an in-house pharmacy, and 7,500 doctors, including 15 working for company clinics. SCE pays 90% of the costs for workers who use network providers and 70% for those who don't. A computer monitors the annual 700,000 interactions between workers and providers. All this has helped keep the increase in SCE's health costs down to about 12% a year, compared with 23% annually before the program began in 1989.

DEVELOPING GUIDELINES. In the quest to control costs, it is critical that quality not be sacrificed. Organized delivery systems should go a long way in that regard. But they all will need reliable information and research on new technologies and treatments.

The federal government could convene panels of experts to develop clinical practice guidelines for hundreds of medical conditions. Experts say doctors change practice patterns when they follow such guidelines. It also should finance research on the long-term outcomes of various procedures. That would give consumers, as well as physicians, better information on what to expect from treatment.

Reviews of new technologies, and trade-offs between their costs and benefits, should be on the federal agenda as well. Large outlays on studies into illnesses that afflict the elderly could be well worth an investment. An average five-year delay in the onset of Alzheimer's disease, for instance, would save $40 billion a year, according to the National Institute on Aging.

Managed competition will have its drawbacks. The most serious is probably the 5- to 10-year time span--not to mention the administrative hassle--it could take to set up top-notch organized delivery systems and purchasing corporations. More crucial: establishing quality measurements that will make the organizations work. And there will be political resistance, especially from smallinsurers and independent-minded physicians. Corporate America must be the driving power behind reform. Although companies are complaining about soaring costs, most do little about it--short of making employees pay more.

But no reform proposal will be perfect or painless. Those who yearn for the days of unlimited care at no cost and with no questions asked should stick to watching reruns of Marcus Welby, MD. Unless Congress takes some action, costs in the medical marketplace will continue to spiral uncontrollably, while coverage continues to shrink. And that's creating a pill too bitter for Americans to swallow.

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