Health care system mess 

Universal health care proposal

History of U.S. health care

Cost containment failure

Social engineering agenda

The uninsured

The third party payer system mess:

&

The health care system has become the most heavily regulated major segment of the American economy, and has become increasingly distorted by seven decades of increasingly intrusive government policy.

  Exhibiting a deplorable ignorance of basic economics, however, the authors repeatedly attribute this mess to private enterprise market failure. They use this "market failure" as the rationale for advocating the total displacement of the current system by a government administered universal health care alternative.

  From its initial issues, FUTURECASTS has forecast that health care would be the most troubled segment of the U.S. economy - that some form of government administered universal health care system would eventually be tried - and that it would ultimately fail.

  As their own history demonstrates, the health care system has become the most heavily regulated major segment of the American economy, and has become increasingly distorted by seven decades of increasingly intrusive government policy.
 &

The authors use the failures of partial government administered alternatives as reasons for expanding reliance on government administered alternatives - ultimately extending to total reliance on government administered health care alternatives.

  This is hardly a "market" system any longer. It is already predominantly a third party payer system. Pervasive third party payer systems inherently destroy all the cost containment capabilities of the market.  As the authors show, all administered substitutes for market cost containment have failed - as they always do. The lack of cost containment is thus unsurprisingly undermining the nation's current health care system (and will ultimately undermine any alternative government administered universal system).
 &
  It is clearly the previous governmental policies that encouraged and directly provided the third party payer mechanisms that are responsible for the current mess. The authors are in reality now using the failures of partial government administered alternatives as reasons for expanded reliance on government administered alternatives - ultimately leading to total reliance on government administered health care alternatives. Government policies - working through tax incentives - first encouraged and then - through middle class entitlements and welfare programs - directly provided third party payer systems. Consumer contribution became minimal or was totally lacking.
 &
  The authors are so sure of the superiority of the social insurance model that they dismiss all opposition as self-interested and irrational. They assert that insurers and the various for-profits have become so politically powerful that they can block even such clearly beneficial legislation as that establishing social insurance schemes. Opposition to new taxes is considered clearly short sighted and irrational.

  These ad hominem attacks on opponents conveniently eliminate the need to address the merits of opposition arguments - and there is in fact a glaring lack of effort in this book to address those arguments. Since the authors are advocating total reliance on a government administered alternative to the current system, they do not want the discussion to focus on the massive failures of existing government policies. The inability of the health care market to function under the crippling third party payer system is set up as a straw man to divert attention from seven decades of increasingly dysfunctional government policies.

  The authors view as unfortunate that doubts about the accuracy of cost estimates are now far more widespread than in the 1960s prior to actual experience with Medicare and Medicaid.

  "The debate about Medicare and its tax implications came at a different time in our economic and political history. In more recent years the litany about government ineptitude and waste, and the accompanying antitax rhetoric, has affected the nature of the debates about health insurance -- and other social programs." (How unfortunate that the facts should perversely fail to conform to their ideological expectations.)

Rapidly increasing health insurance obligations have become a major headache that businesses and unions alike would now love to offload onto the taxpayers.

  Health insurance has been a major asset to labor leaders and businesses in providing funds to manage and benefits with which to assure member and employee loyalty. However, rapidly increasing health insurance obligations have become a major headache that businesses and unions alike would now love to offload onto the taxpayers. A government administered comprehensive social insurance scheme would involve "a massive redirection of dollars now flowing through the system," involving major increases in taxes offset by reductions in business costs.

  "Removing health insurance from the fringe benefit agenda would enhance price competition between employers since they would no longer face health insurance premium payments that depend on the age of their employees, the proportion of early retirees who remain on the firm's health insurance rolls, and the relative costs of medical care in the particular community."

  However, the vast majority of Americans are currently insured and are not convinced that their coverage would be improved by a universal government social insurance system, the authors concede. The authors also recognize that when a massive universal social insurance scheme wends its way through the legislative meat grinder, what comes out may not resemble the ideal proposals envisioned going in. Thus, they believe that the way forward will likely be by means of an incremental approach that ultimately becomes universal.

Implementing universal health care:

The authors reject a "welfare" approach that would cover the neediest first, since this would lack the political power of a middle class entitlement.

  An incremental approach can, of course, proceed in many ways. The authors note that Medicare, Medicaid and the State Children's Health Insurance Program were all enacted in stages and can continue to be expanded in stages. In order to minimize future political debate over future incremental expansions of the system, the authors suggest that all the phases of an incremental scheme be enacted at once with a timetable for implementation or with stated triggering mechanisms. (Who could need further debate?)
 &
  However, they reject a "welfare" approach that would cover the neediest first, since this would lack the political power of a middle class entitlement. Since income status fluctuates, it also adds enrollment complications. The same can be said for a geographic approach, since Americans are so mobile.
 &

All that is needed, the authors confidently assert, is the political will.

  The authors acknowledge the complexity of the enterprise, but express not the slightest doubt about the ability of government to administer it. All that is needed, they confidently assert, is the political will.
 &
  Indeed, a universal health care delivery system is really only the beginning for these authors. Ultimately, "health advancement" must also include social attention to "housing, nutrition, economic status, employment, and the environment, among other areas." These are matters of "social policy" requiring a "social revolution." In short, the authors aim for nothing less than a vast socialist experiment involving a major portion of the U.S. economic system. Universal health care is just an initial phase - a salami slice - towards the establishment of a broad socialist sector in the U.S. economy.

  Where have these authors been during the 20th century? Have they no idea of the variety and extent of socialist experiments that were tried by all kinds of governments in all kinds of countries and that failed during the previous century - and the billions of lives that were thereby blighted by these attempts? How can they so cavalierly assume that inherently inept government management systems will suddenly acquire the capacities needed to administer systems of such colossal complexity and clashing individual, bureaucratic and political imperatives?
 &
  This is a breathtaking degree of intentional - determined - ignorance of the inherent ineptness of government management systems. See, Government Futurecast, at Part II, "Government management," for a summary of the manifold reasons why government management systems are inherently inept (emphasis on the word "INHERENTLY").

  Several issues are expressly recognized by the authors.

• Should reformers strive for a comprehensive plan or incrementally take what the political system will permit?

• How do you address the fundamental problem of costs - especially for a plan that is not comprehensive?

• What, if any, role should remain for private insurers in assisting with the administration of the system?

• What should be the role of for-profit health care providers?

• What should be the role of employers?

Medicare for all:

  A single payer social insurance approach - a "Medicare for all" - like the Canadian system - supported by tax revenues - would simplify enrollment and would be the most efficient to administer.

  "Only with true universality and the assurance of continued universal coverage can we achieve administrative simplicity, provide insurance to those who today are not covered or are inadequately covered, and remove the fear that now grips many Americans who do have insurance, but who are concerned that they might lose it. While it is true that one can conceive of a scheme in which insurance would be provided to all through a varied menu of programs tailored to individual groups within the larger society, that approach is complicated and inefficient and inevitably threatens the continuity of insurance and of care."

  The rate of cost increases would be modest, the authors assert. At the expected modest rate of cost increase, the new system would ultimately cost less than the current system while achieving universal coverage. The authors promise regionalization and rationalization of health care delivery - but offer no specifics.

  Advocates of entitlements always overstate the benefits and grossly underestimate the costs and the rate of cost growth. Universal coverage social insurance systems are not immune to exploding costs. Nor are they devoid of complexities.
 &
  Would there be deductibles? Copays? At what levels? What treatment procedures would be covered for what illnesses? What diagnostic procedures? Who would make these decisions? Could dissatisfied patients opt out and seek private medical care? Could health care professionals provide private care? Would there be private supplemental insurance? Would this undermine egalitarian objectives?
 &
  Who would get to use the best doctors? Who could gain admittance to the best hospitals? Health care, after all, is not a fungible service. The delivery of health care, after all, is a profession, not a matter of mere technique. What would be the incentives for innovation and for optimizing quality and variety of health care services?
 &
  If the U.S. government can't even appropriately maintain Social Security - a large but relatively simple program involving just collecting taxes and disbursing funds according to simple objective standards - how can anyone expect the U.S. government to appropriately manage the nation's complex, highly dynamic health care system?

A mere expansion of the FEHB program:

 The national system would formulate plans and direct system modifications. It would develop budgets for the health care delivery system. It would require constant surveillance of costs and the quality of services and extensive administrative oversight to assure proper provider conduct.

  This would indeed be a good starting point for a national health care program.

  Under this program, beneficiaries are free to choose among providers with the federal government paying all or a substantial part of the bill. As currently established for government employees, it is based on choice, competition, and light regulation. With a few modifications to increase the applicability of market cost control mechanisms, it might even work. See, Gratzer, "The Cure."

  However, the authors seem to expect that the national system would do much more than just pay some or all of the bills. It would formulate plans and direct system modifications. It would develop budgets for the health care delivery system. It would require constant surveillance of costs and the quality of services and extensive administrative oversight to assure proper provider conduct - especially willingness to accept open enrollment of all applicants rather than screening for pre-existing health problems.

  Open enrollment indeed means that everybody has to be in the system from the start since otherwise people could just delay obtaining insurance until they get sick - as often happens under Medicaid.

Rather than a lightly regulated FEHB program, the authors want to impose extensive constraints on for-profit activities to limit further expansion of the for-profit sector, to hold them accountable, to direct their efforts towards meeting social needs, and to tax them for the funds needed to cover the massive government administrative expenses that all this obviously entails.

  The expansion of for-profit health care providers has been detrimental to the health care system in many ways, the authors assert. They recognize that the for-profits are now so extensive a part of the system that it will not be practical to proceed without them. However, rather than a lightly regulated FEHB program, the authors want to impose extensive constraints on for-profit activities to limit further expansion of the for-profit sector, to hold them accountable, to direct their efforts towards meeting social needs, and to tax them for the funds needed to cover the massive government administrative expenses that all this obviously entails. The authors are anxious to impose new tax burdens on the for-profit sector - to use for-profits as cash cows for all kinds of purposes.
 &
  Indeed, the authors would favor a system that would ultimately encourage - with appropriate compensation - displacement of for-profits by not-for-profits, thus eliminating many competitors and health care service alternatives.

  By the time all these regulations and fees are imposed on the for-profits, their worth will be so low that the compensation that the government will have to pay will be modest indeed. The authors do not indicate whether all health care providers will ultimately be dragooned into the system.

The authors assert that there can be too much choice - that it can become confusing and paralyzing.

  The public's desire for choice is just an obstacle that gets in the way of the authors' grand plan. The authors recognize that people want the freedom to choose, but argue that there can be too much choice - that it can become confusing and paralyzing. They express concern that a varied menu system - such as is provided for government employees under FEHB - would be too complicated for many people to navigate, so government should impose a one size fits all approach on everyone.

  This concern for the welfare of the public is really touching, isn't it? However, what the authors are really arguing is that including the health care alternatives that people may prefer complicates government administrative responsibilities.
 &
  The convenience of the bureaucrats takes precedence over the desires of the patients. This, of course, is an inevitable feature of socialist systems. All autocratic schemes are supported by assertions that the people can't be relied upon to figure out what is best for themselves, so government has to do it for them.

Organization of universal health care:

  Medicare and Medicaid could be expanded by phases - probably by age - to ultimately cover everyone. The first phase would probably start with children, since children need the least health care and would provide the biggest expansion for the least financial commitment. An alternative is to simply start with the "uninsured." Coverage of the uninsured is a major intermediate goal.

  Without the slightest idea of how the nation is going to pay for the national health care programs already enacted, a heedless Congress is currently mindlessly enacting a massive expansion of the Children's Health Insurance Program.

The authors provide nothing but boxes on an organization chart.

  And just how is this vast complex enterprise to be run? The authors provide nothing but boxes on an organization chart.
 &
  The authors contemplate a "federalist" approach, in recognition of "the size and diversity" of the country. State and local governments will have considerable leeway to experiment with various approaches supported by federal funding and constrained by federal guidelines and regulation.

  Regulation has aptly been defined as the substitution of error for chance. Regulation can be beneficial - indeed sometimes necessary - but it is never as easy in reality as in contemplation - and generally tends to increase in complexity with time as the world reacts in unintended ways to the regulations themselves. When regulation reaches the complexity of Medicare and Medicaid regulations, it certainly does substitute error for chance.

  The organization chart would be headed by:

• "A national quasi-government nonpartisan commission," reassuringly presented as analogous to the Federal Reserve Board of Governors.

  This commission would administer the federal health insurance system and recommend funding and benefit levels to Congress. It would receive system funds and disburse them to insurers on behalf of enrollees. It would monitor and assure quality of care and the efficient administration of the system.

• Regional boards would plan and integrate health care delivery system changes. This insurance and planning system could integrate the regional and administrative agencies of the U.S. Public Health Service. (Why not? The boards might not otherwise have enough to keep them busy.) The authors want Medicare and Medicaid, too, to be rolled into the program as it expands to cover the uninsured. This would "create a program strong enough to set standards, monitor quality, address health care delivery issues" beyond mere questions of costs and benefits. It would from the start accept voluntary enrollees. It would also include FEHB beneficiaries - a particularly influential group.

  Federal employees and congressmen are going to love this aspect of the plan. This won't happen until pigs fly.

For cost containment, the authors offer nothing other than the common government budgeting procedures that have repeatedly proved no more than minimally adequate in other contexts far less complex than a national health care system.

  Cost containment is a recognized difficulty. However, the authors offer nothing other than the common government budgeting procedures that have repeatedly proved no more than minimally adequate in other contexts far less complex than a national health care system.

  "We would require that the regional authorities develop projected or recommended health care operating and capital budgets and that these be transmitted to the central board. In turn, those budgets would provide the basis for the development of a national operating and capital budget -- which subsequently would be allocated into final regional budgets. This budget should include support that is sufficient to generate and regenerate workforce resources -- including support for medical education."

  The authors apparently feel that even all this will not be enough to keep the boards busy. They view this vast, complex budgeting and planning effort for this vast complex nationwide health care system as an opportunity to encourage debates about resource allocations and system benefits. Along with "nonpartisan" professionals, the boards would include members who "represent" the public. The boards would provide opportunities for "substantial public input."

  This is hardly analogous to the Federal Reserve Board of Governors. What is glaringly missing are any thoughts on how this Rube Goldberg mechanism would actually contain costs.
 &
  Nothing demonstrates the unreality of the authors' plans like the assumption that a system allocating hundreds of billions of dollars can be kept "nonpartisan" and limited to those who "represent the public." How these "representatives" are to be chosen is not discussed. Will the medical profession dominate these boards - like teachers unions dominate many school boards? Their interests do not run towards cost containment. One of the authors' primary concerns, for example, is expanded financial support for teachers hospitals and medical schools.
 &
  Indeed, the authors stress that the public will just have to choose to fund the system as a priority. As with public education, they will just have to accept the costs generated.

Funding will be through the tax system.

  Funding, too, is just a matter of boxes on the organization chart. During the phase-in period, there may be various funding mechanisms employed. However, ultimately, it is the IRS that is the agency naturally to be tasked with administering the collection of funds just as it does for Social Security and Medicare. Whatever the mix of individual and/or employer premium and/or tax payments and/or tax credits and/or government subsidies employed, the IRS has the data needed to administer a suitably graduated system of payments. Ultimately, the IRS provides "an administratively simple way" to achieve universality and end the current employment based system that so clearly benefits most those in the highest income brackets.

  "The course we have outlined builds on familiar arrangements: phasing -- by age or by insurance status --, creating a federal program that extends the FEHB program already in place, and providing federal financial assistance that would enable individuals to enroll in the new program, thus making it possible for individuals who have no employer-provided insurance to acquire coverage. It would preserve a -- limited -- role for insurance companies and managed care entities." (emphasis added)

   As can be seen from the above, the authors contemplate nothing remotely resembling a mere extension of the current FEHB plan. Their governing boards will be nothing like the Federal Reserve Board of Governors. References to these systems is a disingenuous effort to lull the reader into underestimating the complexity, difficulties, and radical nature of the authors' plans.
 &
  Moreover, there is still not the slightest hint of any cost control method that might avoid the destruction of incentives for innovation and maintenance of the quality and variety of services. And, there is no discussion as to whether the system will deliver a level of health care coverage at least equal to the current system, or whether coverage will be reduced for the vast majority of Americans to some common denominator.
 &
  The "level of benefits" on offer is, after all, a part of the contemplated planning process. It will be set by an autocratic bureaucracy. Choice for patients is to be squelched. 

Establishment of the third party payer system:

  The Social Security Act of 1935 provided grants to the states for crippled children and maternal and child health care programs. The federal government became increasingly involved in funding medical research through the National Institutes of Health. By 1965, the national government was providing $1.3 billion for medical research - 87% of the total. The effort was not free from political influence. The government began picking the winners and losers.

  "Even as it allocated research dollars on the basis of scientific merit, it made resources available to help historically less well-endowed schools develop their intellectual capital and research capabilities, thereby enabling them to reach their potential and compete more effectively for future research grants." (In other words, financial benefits had to be spread among more congressional and senatorial constituents.)

  Medical school administration and the teaching role of the medical schools were losers as funding by the government increased the relative importance of the research role. Researchers had divided loyalties. Many were more concerned with satisfying their government grantors than with the administration of their medical school or the teaching of their students.
 &
  Grantors were gaining more control over research activities than the deans. University administrations were losing to the government granting agencies the ability to control their institution's program and destiny. The growth and stability of private and state medical schools were increasingly subject to the federal budget. Recognizing the shifting sources of funding, the influential Association of American Medical Colleges moved its offices from Chicago to Washington in 1986.
 &

  Private insurance approaches had concentrated coverage on hospital care - the expensive part of health care. There was competition between the not-for-profit Blue Cross insurers that offered broad coverage based on a community rating approach and for-profit insurers that offered lower premium coverage for lower risk groups.
 &
  Community rating essentially imposes a tax on lower risk individuals for the benefit of higher risk individuals. It reduces the incentive for lower risk individuals to purchase insurance and actually prices some of them out of the market. Risk-based insurance prices some higher risk individuals out of the market while encouraging more lower risk individuals to insure. The spread of for-profit risk based insurance set the stage for federal programs to help the most vulnerable - and the most excluded - members of the community.
 &
  There was also competition between traditional fee-for-service insurance plans and prepaid group plans. The latter were fiercely opposed by the American Medical Association ("AMA"), but efforts to exclude prepaid group plan doctors from hospital privileges were struck down by the Supreme Court in AMA v. U.S. (1943).
 &

  Group plans had both advantages and disadvantages.

  "Group enrollment meant a reduction in a wide variety of administrative expenses, for example those associated with marketing and collecting premiums in bulk rather than from individuals. Group enrollment also meant that the power of numbers could be mobilized on behalf of the subscribers. The insurer did not have to worry about self-selection aspects that might induce sicker individuals to join and healthier ones to opt out. Instead, the average risk for the group -- and under community rating, for the community -- applied to all. - - - If the group were large enough, no catastrophic event, however costly, would have a significant impact on the premium."

  However, small firms and their insurers could not take the risks of some catastrophic loss afflicting a member of a small group. Small groups or groups consisting of many high risk individuals find it difficult to sustain the subsidy for high risk individuals.
 &

Since insurance covered hospital care, there was a "perverse incentive to hospitalize individuals."

  Tax breaks from and after WW-II, both for the employer and employee, were powerful incentives for the inclusion of health insurance as a benefit of employment. By 1951, 77 million people were covered by some form of health insurance.
 &
  Unintended consequences were not long in making their appearance. Since insurance covered hospital care, there was a "perverse incentive to hospitalize individuals." Diagnostic tests that could have been performed on an outpatient basis instead resulted in a hospital stay. The number of hospitals and hospital beds increased substantially. The 1946 Hill-Burton Act provided federal funds for hospital construction (and thereafter gave the federal government a substantial say in the practices of those hospitals - much to the surprise and chagrin of the hospitals).
 &
  The Blue Cross commitment to consumer rating came under increasing cost pressures as healthier risks opted for lower cost fee-for-service insurance. Adjustments based on gender and age were tried but were not enough, so the Blue Cross insurers were ultimately forced to apply an experience rating. Higher risk groups faced higher premiums.
 &

The grossly inefficient use of emergency rooms for primary care of the uninsured became standard practice.

  Supply and demand apply to the health care market as to other markets. The spread of insurance increased demand into a market with a sticky supply curve. It takes a long time to increase the supply of health care professionals. Health care costs were soon rising rapidly. This stimulated a buildup in health care resources and an upgrading in technology that added to costs. (In other industries, technological advances decrease costs.) This in turn increased the importance of insurance.
 &
    Those left out were not linked to employer provided, tax advantaged health insurance. They included retirees, the unemployed, low wage workers and part time workers and the low income self employed who faced constantly rising premiums in the insurance market as individuals rather than as members of a group. These people increasingly had to rely on charity or on some county or city public hospital. The grossly inefficient use of emergency rooms for primary care of the uninsured became standard practice. (Federal government requirements forced hospitals to open their emergency rooms to provide ordinary clinical care to the uninsured - so many were forced to close their emergency rooms.)

  "Medicine could do more, and because it seemed inevitable that it would continue to advance, having access to care was ever more important. Moreover, one could sensibly argue that since the private competitive sector appeared unable to achieve a goal of reasonable distributional equity in access to insurance and medical care, there was an increasing need for government intervention."

  Markets do many things - especially involving the efficient allocation of scarce resources - but what they do does not include "distributional equity." Unfortunately, the distortion of markets to achieve "distributional equity" can undermine the markets. As all manner of socialist experiments proved throughout the 20th century, you can't carve greater slices of "distributional equity" out of a diminishing economic pie. The government should purchase the services it wants, rather than trying to twist the market out of shape - or worse, impose a government administered substitute - to get those services.

  The Kennedy administration came into office in 1961 with a varied agenda, including the expansion of government health programs to include Medicare for individuals 65 and older.
 &
  Mental health was the first health care need addressed in the 1960s. The Mental Retardation Facilities Construction Act and the Community Mental Health Centers Act came in 1963.
 &

  Then Medicare was enacted under the Lyndon Johnson administration. This was intended from the beginning not just to provide hospital coverage for the elderly, but as a cornerstone on which to build an "inclusive universal program" of health care. The authors go at some length into the political debate.
 &
  To make the program more attractive, the subsidized voluntary Medicare Part B program was included to cover physician services, and a broad complex Medicaid program was enacted for federal and state funding of medical care and nursing home long term care for welfare recipients and certain categories of pregnant women, and for other state programs.

  "It covered three million additional aged persons who were not part of the Social Security system, allowed more days of hospital and nursing-home care, created a voluntary -- but heavily subsidized -- program to cover out-of-hospital services, and, though separately enacted, provided Medicaid assistance for acute and long-term care to many of the nation's poor."

  The authors point out that Medicare subsidizes access to the traditional health care system - acting much like traditional insurance. The legislation specifically forbids federal government "supervision or control over the practice of medicine, the manner in which medical services are provided, and the administration or operation of medical facilities."

  However, unlike traditional individual insurance, it does not individualize coverage or customize deductibles and copays to limit insurance coverage to catastrophic losses or losses that would be difficult to bear.

Heath care entitlements affected and distorted health care delivery systems and generated additional inflation in health care costs, while leaving significant numbers still without health care coverage and increasing the expense of obtaining it.

  Again, the noxious unintended consequences were not long in making an appearance. The 1960s and 1970s were an age of inflation and societal flux. Defects in the program became increasingly apparent as the program affected and distorted health care delivery systems and generated additional inflation in health care costs, while leaving significant numbers still without health care coverage and increasing the expense of obtaining it.
 &
  The health care aspects of the Great Society agenda in total included:

  "community mental health centers, Office of Economic Opportunity neighborhood health centers, Head Start, children and youth projects, regional medical programs, comprehensive health planning, multicounty demonstration health facilities, public health formula grants, project grants for health service demonstrations, the Nurses Training Act, the Allied Health Professions Training Act, support of medical, dental, optometry, pharmacy, and veterinary education, and Medicare and Medicaid."

  These programs immediately greatly increased demand for health care services, but supply increases were far slower to come on line. Health care cost inflation quickly surged to double digit rates, far exceeding even the substantial rates of general inflation of the 1970s. The issue of access to health care was perforce replaced by the issues of cost inflation and methods of restraining cost inflation.
 &
  Health expenditures as a percentage of gross domestic product surged from about 6% in 1965 to about 13.5% in 2000 and have moved substantially higher since then. The authors point out that much of this is for expanded facilities and improved technology and medicines, but recognize that there is a limit to how much of the nation's wealth can be allocated to providing even so important a commodity as health care.
 &

Regulations added to costs and caused much dissatisfaction among patients and providers alike.

  Inevitably, administered cost control alternatives - price controls and the rationing of care - were attempted - and just as inevitably experienced little success. The problems of third party payer systems were becoming ever more evident. Regulations added to costs and caused much dissatisfaction among patients and providers alike.

  When the government imposes administered alternatives to market pricing mechanisms, all manner of dysfunctional results are inevitable. This well known fact of economics was confirmed by even by the U.S. Government in studies at least four decades ago. See, "Administered Prices and Health Care Entitlements."

"Medicine, after all, is an art as well as a science; physicians and nurses must exercise judgment, and the predominant 'culture' can and does influence behavior."

  Health Maintenance Organizations (HMOs) - a form of prepaid group practice of which the Kaiser Permanente health program was an outstanding example - were encouraged beginning with Nixon administration legislation passed in 1973.  Managed care sought to restrain cost growth by administered methods. However, it took a long time and much additional legislation before HMOs really took off. Employers desperate to contain health benefit costs pushed employee enrollment.

  "With the spread of HMOs and its broader successor, 'managed care,' patients and prospective patients gave up the right to choose from among all physicians in practice and were limited to those physicians in the particular organization."

  HMOs had considerable success in reducing hospital utilization. However, patients ultimately rebelled against the choice restraints and the effort failed. As the authors cogently explain:

  "Medicine, after all, is an art as well as a science; physicians and nurses must exercise judgment, and the predominant 'culture' can and does influence behavior. While fee-for-service medicine could be profligate in its resource use, HMOs -- especially as an increasing proportion became for-profit and beholden to stockholders -- ran the risk of being parsimonious. - - - [There] is a need for balance, a characteristic most avidly to be sought, in part, because it is so difficult to attain."

Swamped by unintended consequences:

&

  Again, there were unintended consequences. The impact extended beyond the intended restraint in hospital utilization to medical school curricula and "relationships between medical education and the world of practice both in and outside their affiliated hospitals."

  "The law of complex systems" is repeatedly demonstrated here. If you are going to change a complex system, you can never do just one thing. Moreover, each fix of adverse unintended consequences will have additional unintended consequences, some of which will be adverse.

Experience with the inadequacies of entitlement cost projections undermined the case for expanded entitlements. The Medicare program that was supposed to only cost $9 billion by 1990 cost $90 billion, instead - only about half the increase being accounted for by the general rate of inflation.

Congress had surrendered an increasingly significant segment of the power of the purse to forces outside its control.

  However, the issue of "cost control" increasingly took top priority away from "access." Big government in general and entitlements in particular lost their charm in the 1970s and 1980s as the costs greatly exceeded expectations and the results frequently fell short. Proponents of national health insurance began to supplement their case by arguing that after an initial increase in costs, national health insurance with suitable budget controls would ultimately prove less costly than the mess that had been created.
 &
  However, experience with the inadequacies of entitlement cost projections undermined this case. The Medicare program that was supposed to only cost $9 billion by 1990 cost $90 billion, instead - only about half the increase being accounted for by the general rate of inflation. Medicaid experienced similar cost growth - and costs in both entitlements continued out of control thereafter.
 &
  Costs under the current third party payer system was in any event out of control. Per-capita health care expenditures for personal health care rose from $124 in 1960 to $1,523 in 1985. In the two decades after 1965, they rose tenfold in current dollars.
 &
  The impact on government budgets tell a similar story. In 1965, public financing was about $10 billion, with half coming from the federal government. By 1984, it was $174 billion with $123 billion coming from the federal government. Most of this was due to the entitlements - and was outside the budgetary control of state and federal legislatures. Congress had surrendered an increasingly significant segment of the power of the purse to forces outside its control.
 &
  Demographics and medical advances (and health care cost inflation) were pushing health care costs ever higher. There were no politically viable alternatives.
 &
  At the local level, however, access problems could not be ignored. Real people with real health care needs had to be accommodated. And inevitably, this was expensive.
 &

The costs of providing for the indigent uninsured were largely shifted to the insured - pushing up insurance premiums and pricing more people out of the insurance market. Gaps grew in what Medicare and Medicaid provided for and what was needed.

  There were yet more unintended consequences. The costs of providing for the indigent uninsured were largely shifted to the insured - pushing up insurance premiums and pricing more people out of the insurance market. Gaps grew in what Medicare and Medicaid provided for and what was needed. Administered cost controls proved - as always - ineffective, unacceptable - and expensive to administer.

  "The argument that a national health insurance program with a tight budget would help contain costs may have impressed some academic analysts, but few legislators felt at ease with a budgeting system that [Carter administration] Secretary Patricia Harris - - - had testified 'is beyond our technical capability - - - could work only in a highly structured health system which places severe limits on consumer access - - - [and] would inevitably result in an arbitrary rationing of health care services.' Furthermore, adoption of national health insurance would have injected government into matters that lay in the private sector and for which physicians, hospitals, and insurance carriers -- but not members of Congress -- were held responsible."

  All of this, the authors stress, does not negate the vast advances in the quality and delivery of health care services since WW-II. Both access and outcomes have improved immensely.
 &
  But the problems were real. Distributional imbalances exist between specialists and generalists, urban and rural, poor and affluent. The system kept expanding in terms of quality and quantity of services provided - but the problems of ever rising expenses and the redistribution of services to the underserved were not addressed.
 &

Hospital stays were extended, tests proliferated and were repeated, new equipment was obtained regardless of community need, debts were incurred to be financed by future grants and government reimbursements, etc. "Cream skimming" and "cherry picking" became increasingly familiar means for insurers and providers to reduce costs and increase profits.

  As soon as market cost constraints were removed by the flood of government money, costs exploded in innumerable ways summarized by the authors. Hospital stays were extended, tests proliferated and were repeated, new equipment was obtained regardless of community need, debts were incurred to be financed by future grants and government reimbursements, etc. "Cream skimming" and "cherry picking" became increasingly familiar means for insurers and providers to reduce costs and increase profits.
 &
  The inevitable result was a vast, expensive - and inevitably ineffective - effort to contain costs by administrative alternatives to the market. Instead of incentives for over-treatment, it created incentives to limit treatment. (Hospitals had to hire expensive consultants to help them meet complex regulatory requirements - adding to health care costs.)
 &
  The vast, complex, varied health care system became an uncontrollable mechanism for absorbing increasing resources - absorbing increasing shares of gross domestic product. All parts of the system had to adapt to the new forces unleashed by each public health care initiative and the private responses to those initiatives.
 &
  Despite the great improvements in the system, the U.S. does not appear to be getting value for its money. The U.S. system is the most expensive - and at least with respect to infant mortality rates - the least effective compared to the other advanced countries. Even accepting the higher infant mortality rates for blacks and native Americans which may have multiple causes outside the health care system, the U.S. record is only average - and considerably worse than the Scandinavian nations and Japan.

  The authors totally neglect figures for cancer, stroke or heart disease, or access to diagnostic tests and needed treatments in general. The latest cancer mortality figures per 100,000, for example, is 196 for the U.S., 235 for the UK, 244 for France, 270 for Italy, and 273 for Germany.

  Actually, most of the advances in health care have come from promotion of healthy living habits and disease prevention rather than from improvements in clinical care. In recognition of this, the U.S. Surgeon General's office has since 1979 continuously encouraged the study and promotion of methods of disease control and prevention. The attack on smoking and the substantial reduction in public exposure to smoking and passive smoking is highlighted by the authors. (Other programs have emphasized safety equipment - helmets for cyclists, seat belts for automobile passengers, etc.)
 &

  The supply side of the economic picture naturally came in for considerable attention. The 1963 Health Professions Educational Assistance Act provided construction funds for schools that committed themselves to increased medical student enrollments. Scholarships in return for public service were provided under the National Health Service Corps program. States, too, provided funds for these purposes.
 &
  Dozens of new schools were opened. The number of graduates more than doubled, from about 7,500 in 1960 to 16,200 in 1980. Minorities and women were able to gain admittance to the profession without diminishing access by white males. Thousands of graduates from foreign medical schools added to the supply each year. A further flow came from offshore - usually Caribbean - proprietary medical schools open to American students who had not gained admission to U.S. schools.
 &
  By the late 1970s, it was feared that there would be a surplus of physicians. Efforts by the medical establishment to constrain the offshore flows were countered by pressure from hospitals that needed them for their staffs and by the families that supported the students.
 &

Studies revealed wide and disturbing variances in the number of procedures performed, practice methods, and the length of hospital stays.

  Medical school curricula also underwent significant changes, as outlined by the authors. The digital revolution impacted all aspects of medical science, practice and facilities. There was much ferment as different approaches were tried. Through it all, the performance of students, teachers, researchers and physicians was by all measures more than maintained.
 &
  However, patient displeasure with their medical care experience was increasing - less over their relationship with their care givers than with the administration and financing of their care. Physicians, too, were struggling with administrative requirements, and many were unprepared to respond in a compassionate manner to their patients.
 &
  Specialization and specialty certification became the norm. Even family practice became a specialty. Internship and residency requirements expanded - and so did student debt.
 &
  Studies revealed wide and disturbing variances in the number of procedures performed, practice methods, and the length of hospital stays. These variances seemed most related to geographic area. "It was evident that not every practitioner could be doing the right thing."
 &

  Physician "oversupply" concerns appeared in many specialties in the 1980s, replacing physician shortage concerns. Even with respect to the acknowledged "sticky" supply curve of the health care market, administered alternatives - "rational planning" - were proving less than satisfactory.

  "There were symposia, conferences, reports and recommendations, but the medical community was not yet ready to break with the old traditional view that, unlike other occupations and professions, physicians were free to decide what to practice, where to practice, and on whom to practice, that is, that physicians did not face an employment market."  (How is this different from lawyers and accountants - professions that include sole practitioners and small partnerships as well as those working for various large firms and organizations?)

  Continuing medical education requirements proliferated to assure maintenance of appropriate skills in a rapidly advancing medical world. This was yet one more regulatory burden for physicians. Much of this education was sponsored by pharmaceutical firms and was held in luxurious locations - raising obvious conflicts of interest.
 &
  However, methods of judging clinical performance were lacking. "Audits" and informal peer reviews were inadequate. Fear of litigation prevented establishment of any formal method of evaluation.
 &
  Change was widely recognized, expected and feared, but the medical community was fully occupied with the varied demands on their time and was not equipped or organized to take an active role. Both market mechanisms and regulatory efforts were failing to deal with growing problems of access and cost. (Indeed, the regulatory efforts were playing a major roll in the evolving nature of the problems of access and cost.)
 &

The rise of for-profits:

  An increase in for-profit hospitals  came first. With Medicaid, there was an increase in for profit nursing homes. Then there was the "corporatization of medical practice." While concentrating on fending off government control of medical practice, many doctors - without a fight - now surrendered control of their medical  practice to corporations. This, the authors assert, was a great failure of the American Medical Association.

  "[They] did not recognize that the marketplace and the behavior of employers who were large purchasers of insurance and of investors who were 'medical care entrepreneurs' would represent an even larger threat. While organized medicine could lobby government, it could not identify a locus for exerting pressure against employers who were more actively questioning the costs of and expenditures for medical care. Nor could it identify a locus for resisting the forces of Wall Street that were seeking new opportunities to increase profits by constraining physician behavior and cutting costs. Organized medicine knew where and when the legislature was meeting in open session; it was unable to find its way to closed boardroom doors."

  This is yet another unintended consequence of the displacement of the disciplines of a competitive market by third party payer and administered alternatives.

  The influence and power of the AMA and other medical associations was soon in decline. Of course, many physicians became important entrepreneurs and administrators in this growing for-profit sector. Medical students and physicians began enrolling in schools of business administration. However, they faced inevitable conflicts of interest between their roles as cost controllers and providers of health care services. As doctors, they were obliged to support clinical freedom, but as corporate executives, they were obliged to constrain clinical decisions to control costs.

  This conflict of interest is inevitable. It always exists and has always existed. Health care services are limited resources that must be allocated on some basis - even by sole practitioners - and even under universal health care schemes. Indeed, competitive market mechanisms are far superior to any administered alternative in allocating scarce resources - even in health care. Only where the market does not serve is there superior outcomes for charity or government welfare alternatives - and they seldom match the quality and efficiency that the market delivers.

The for-profits at least countered tendencies towards "over-doctoring." By constraining hospital stays and diagnostic testing, they had major impacts on costs.

  The corporatization of health care practice was greatly facilitated by the rise of third party payer systems, the authors acknowledge. Physicians were increasingly employees or at least partially dependent on salary, capitation or other contract arrangements.
 &
  These for-profits at least countered tendencies towards "over-doctoring." By constraining hospital stays and diagnostic testing, they had major impacts on costs. Where costs are of no concern, there is no check on the proliferation of diagnostic testing and hospital stays and other procedures as means of increasing revenues from third party payers. Patients who are economically locked into the third party payer - managed care system are (unsurprisingly) powerless to counter any reduction in quality of health care.

The cost containment crisis:

  Indeed, all the incentives were on the other side since rising costs increased revenues and profits. The authors view this as a weakness in market mechanisms (thus again demonstrating their abysmal ignorance of basic economics).
 &
  However, employers did have to pay out of their own pockets - for the rising insurance premiums. They began to question the rising costs. They intruded on questions of "medical necessity" and the quality of medical services. Inevitably, they began applying market mechanisms as the only effective response to runaway costs. Deductibles and copays and employee contributions to premium payments were employed.
 &

Patients became mere onlookers in the battles between employers, insurers, government payers, and providers.

  Patients experienced discontinuities in care as dissatisfied employers shifted insurers and managed care entities. Patients became mere onlookers in the battles between employers, insurers, government payers, and providers. However, the patients were the "real consumers" of health care.

  "Real consumers" pay for the goods and services received. If you don't pay the piper, you can't call the tune. Lack of consumer influence is the nature of the third party payer health care system, and inevitably will be much worse under a universal health care system that the authors acknowledge will strip choice from the majority who still have it.

Both the patient and the physician had been rendered relatively powerless by the third party payer system. The employer and insurer sought to protect their interests - interests that frequently were at odds with those of the patient and physician.

  The system was thus inherently dysfunctional. Both the patient and the physician had been rendered relatively powerless by the third party payer system. The employer and insurer sought to protect their interests - interests that frequently were at odds with those of the patient and physician.
 &
  Inevitably, the disparate parts began to coalesce. Hospitals bought up or contracted with practices and insurers and acquired or developed their own health management organizations, etc. Some of the larger businesses self insured and developed their own HMOs. Insurers established contractual relations with physicians or bought their practices. The acquirers did not always understand the businesses they had acquired. Fears of monopoly practices and conflicts of interest were aroused.
 &
  All the other parts of the system tried to contain costs by imposing constraints on physician practices. They limited resort to specialists and hospital stays and diagnostic testing. Worse, they tried - with only limited success - to get physicians to refuse to inform patients of new but expensive diagnostic and treatment options. Bonuses were offered for achieving utilization constraint goals. This inevitably aroused public concern over whether physicians were working for the insurers or the patients.
 &

  The authors express astonishment at how fast the unintended consequences evolved - how fast the industry changed in response to the spread of the third party payer system. It "could not have been anticipated," they assert. It could not have been "imagined" how powerless the medical community would be to oppose the changes. (Nothing demonstrates their abysmal ignorance of basic economics like these assertions.)
 &
  The HMO managed care route was ultimately tried by Congress, but this too failed. For-profit HMOs had the capital to expand rapidly and dominate the field. They achieved some significant cost reductions - primarily by rationing hospital care and diagnostic testing - but this was a one trick pony. Ultimately, costs again began to rise.
 &

  Medical research, too, was inevitably affected by entrepreneurial incentives. Instead of an open academic process, academic researchers began taking out patents and commercializing results. While research efforts continued to achieve great successes, the system was generating conflicts of interest. The entrepreneur-investigator was employee both of a university and a sponsoring commercial establishment.

 "Since research findings had important financial repercussions on the particular firms that had sponsored the research, work that had previously been shared with students and colleagues often came to be viewed as falling under the rubric of trade secrets."

  The authors do not venture any estimate as to whether these arrangements have advanced or hindered the pace of research.

The search for a national solution:

  The Clinton administration responded - but instead of a simple single payer national health care system - perhaps an expansion of Medicare - it engaged in an effort to satisfy the manifold interest groups. The result was "Hillary care" - a complex monstrosity of employment linked mandates and regulations. This was rejected not only by Congress, but by the electorate, too, in the succeeding Congressional elections.
 &
  The authors blame the failure on many factors - including complexity, a secretiveness that failed to engage the Congress and public in the design process, effective special interest opposition, and a public majority that had health insurance and saw no need for change.
 &
  As government retreated from the problem, costs again began to escalate. This failure to contain costs, improve consumer satisfaction, serve the uninsured or underinsured and increase access under the third party payer system is yet again misrepresented by the authors as a failure of the "private sector."
 &
  Meanwhile, the public sector was in retreat from its increasingly costly welfare system obligations. State and local government concerns with long-term chronic care presented even more challenging funding problems than federal funding for acute care. Absent market cost constraints, the system was observably crumbling. 

    "The striking decline in the number of municipal and county hospitals and beds that were publicly supported, inconsistent support for community health centers, and obstacles in maintaining Medicaid eligibility made it difficult for the poor to receive adequate continuing services. The emergency room was hardly the place to find continuity."

  However, Congress continued to undertake additional obligations. A number of initiatives were enacted in succeeding years providing federal assistance - sometimes through state participation - to uninsured children and particular groups of patients, and facilitating insurance portability for those leaving employment positions that had provided insurance. (This process is heedlessly going into overdrive in the current Congress.)
 &
  Research into health care usage and lifestyle impacts was stimulated by the continuing need to restrain costs - with considerable benefits beyond cost reductions. Increases in deductibles and copays and co-insurance arrangements were also employed to constrain cost growth - or at least shift some of the burden - with more problematic impact on quality of service. The "nagging equity issue" inevitably arose as the impacts hit most heavily on lower income employees. Efforts to employ HMOs to reduce Medicaid health care costs also failed.
 &

  And always, the administrative requirements - and administrative costs - of an ever-more-complicated system of administered alternatives to market cost constraints served instead to absorb vast percentages of health care resources and continued to impose unwelcome intrusions into patient-physician relationships.

  "In a sense these efforts represent a recognition that the health care system operated with a confusing set of conflicting objectives: employers and government wanted to contain costs; insurers felt they had to respond to those demands and control premiums; patients, impressed by the explosion in medical knowledge and information, wanted the benefits of new medical care advances; and physicians wanted to  practice medicine under conditions that maximized their clinical freedom. No single health care institution could resolve those conflicts." (These are among the complex things that competitive markets routinely take care of.)

  Naturally, government, too, was not the answer as it inevitably responded to a wide array of political and bureaucratic imperatives. The wealthy could still procure the health care they wanted, but the broad middle class was being stripped by the rising costs of the third party payer system of many of the choices they might have otherwise had.

Unlimited ambition:

 &

The authors view it as essential that the interests of inidividuals be sacrificed for the broader societal interest in a universal system.

  The system must also serve as a mechanism for social engineering - for achieving egalitarian outcomes. They dread the prospect that government may ultimately resort to a voucher system - that it might even resort to one "that is income related" - in response to Medicare cost problems. "That, of course, would end social insurance Medicare as we know it." (Horrors!) The voucher alternative is mentioned just once.
 &
  Medical Health Savings Accounts are also mentioned just once - and similarly deplored and dismissed. If they worked, they would facilitate the abandonment of "the general insurance pool" by people who are healthier and live healthier life styles. The authors view it as essential that the interests of these people be sacrificed for the broader societal interest in a universal system.
 &

  If they just cut corruption levels in half, the undeveloped nations could fund some very substantial research efforts themselves.

There is simply not enough in the public health budget to achieve all these desirable objectives.

  Medical education, too, suffers from the varied noxious impacts of the third party payer mass medicine system. Of course, medical education has been considered to be 'in crisis" throughout the 20th century, yet seems to have managed quite well. As always, the primary need seems to be more funding.
 &
  There is simply not enough in the public health budget to achieve all these desirable objectives. Making choices and establishing priorities for the use of scarce financial resources are what budgets are for. There is never "enough" to meet all needs. The authors complain about having to make such choices.
 &

  Then, the authors provide this remarkable sentence about the current health care system mess:

  "This is true even after more than a decade of an experiment in free-market dominance and a reliance on competitive forces."

  To say this statement constitutes an abysmal ignorance of basic economics is too kind. It is like a doctor blaming pain on a patient's nervous system when the patient is repeatedly beating his head against a wall.

 Individual physicians remain too preoccupied with the demands of their practices to get actively involved in broader policy issues, so the AMA decline has left the profession without an effective voice in the policy debates.

  Useful coverage of medical care distributional problems is provided by the authors. They cover issues related to rapidly rising malpractice premiums, the financing of services for the uninsured, simplification of third party payer administrative procedures, the increasing emphasis on preventive services, the need to increase the funding for public health care infrastructure, and the declining membership of the AMA. Individual physicians remain too preoccupied with the demands of their practices to get actively involved in broader policy issues, so the AMA decline has left the profession without an effective voice in the policy debates.
 &
  They advocate utilization of the prepaid group practice model for managing the complexity of modern health care. The system needs planned rationalization. The academic health centers should be provided adequate funding to act as hubs in the public health care infrastructure.
 &

  Then, once again, the authors' ignorance of basic economics is exhibited. With the failure of Hillary care, they assert, "the nation chose -- or was forced to -- rely on free-market competition as the solution to the various health issues," including the uninsured, misdistribution of resources, and rapidly rising costs. "To the nation's regret, the free market failed to provide the needed remedies." (emphasis added)

  Again the authors indulge in this patently ridiculous effort to characterize the current dysfunctional third party payer heavily regulated system with its large administered pricing segment as a "free market" system. Of course, at best, the health care market would not be "perfect," especially considering its sticky supply curve. However, experience during the last three decades has amply demonstrated that deregulated markets deliver a cornucopia of benefits even when far from "perfect." For an account of what it will take to introduce meaningful competition into the health care market, and the massive benefits that would accrue from such an effort, see Porter & Teisberg, "Redefining Health Care."

  The authors are well aware of the differences between the current system and a functioning free market system, but choose to view those differences as market failure rather than as failures of the administered alternatives (the third party payer mechanisms, the vast administered pricing segment, the managed care mechanisms, and the welfare programs that together dominate the system). 

The uninsured:

&

  The uninsured receive health care through emergency rooms and other ad hoc arrangements. This is spasmodic, ineffective and expensive. Their health outcomes are considerably worse than for those with insurance. The current method is so expensive, that the authors estimate that insuring the uninsured would increase national health spending by just 3% - or about $40.7 billion.

  Such estimates are always low-balled by social program advocates. Again, remember, Medicare was only supposed to cost $9 billion by 1990, but cost $90 billion instead. Only half of that excess was accounted for by the general rate of inflation.

  As it is, health care for the uninsured poor is paid for - through taxes and through "cost shifting" - charges passed on to the insured as overhead and covered by their premiums. It constitutes a sales tax that punishes those that purchase insurance.

  The authors do not deign to parse these figures in any meaningful way. The "uninsured" include welfare cases that can obtain Medicaid whenever they need it and the wealthy who could afford to purchase insurance but choose to self insure, the unemployed and low wage workers who can't afford insurance, and the self-employed professional who chooses to self-insure, the person who hasn't had insurance in more than 5 years and the people between jobs who will be uninsured for a few months or a couple of years. They are all viewed as one homogeneous mass by the authors.
 &
  This book is written by two brilliant doctors - Harvard faculty members - proposing a radical reorganization of over 15% of the U.S. economy - with hopes of ultimately extending the reorganization much further. The authors' plans have as much chance of success as the publisher of FUTURECASTS would have treating a ruptured appendix.