PROGNOSIS NEGATIVE: Health Care System in Crisis

Friday, June 14, 2002

Ten years ago, soaring health care costs prompted the Clinton administration to propose sweeping reforms to the health care system, including a substantial new role for the federal government. But the plan drafted under the guidance of First Lady Hillary Clinton was defeated in Congress. A decade later, the problems with our health care system seem to have only gotten worse. In the recent economic downturn, millions lost their insurance along with their jobs, adding to the estimated 40 to 45 million Americans who have no medical insurance at all. Meanwhile the costs incurred by government and businesses to keep the rest of us covered are skyrocketing. Has the HMO model of health care that became predominant in the 1990s failed us? If so, what should replace it?

Recorded on Friday, June 14, 2002

Peter Robinson: Today on Uncommon Knowledge, healthcare--taking care of patients or taking care of business?

Announcer: Funding for this program is provided by the John M. Olin Foundation and the Starr Foundation.


Peter Robinson: Welcome to Uncommon Knowledge, I'm Peter Robinson. Our show today, the emerging, or reemerging, healthcare crisis. Back in 1993 with healthcare costs exploding, President Clinton promised to solve the healthcare crisis by instituting a universal healthcare plan backed by the federal government. Then two things happened, Clinton's plan went nowhere in Congress and healthcare prices actually began to moderate. Today, almost a decade later, healthcare prices are once again exploding. Why? What should we do about it? Should we go back to a plan like the one President Clinton first proposed or should we try a very different solution instead?

Joining us three guests. Alan Garber is a professor of medicine and director of the Center for Health Policy at Stanford University. Helen Schauffler is a professor of health policy at the University of California at Berkeley. And George Halvorson is chief executive officer of Kaiser Permanente, the biggest not-for-profit HMO in the nation.

Title: The Anguished Patient

Peter Robinson: I quote George Halvorson, chief executive officer of Kaiser Permanente: "Healthcare purchasers at all levels are unanimous in demanding that healthcare expenditures be somehow controlled. The problem is that no one seems to have any clear ideas about how." George spoke those words in 1993, almost a decade ago. Since then have things gotten better or worse? Alan?

Alan Garber, M.D.: With the aging of the population and a boom in new biotechnology products, we're facing greater challenges today than we did when George said that.

Peter Robinson: Helen, better or worse than in 1993?

Helen H. Schauffler: From the consumer's perspective, I'd say it's much worse because to a large degree the industry's response to the rapidly increasing cost now is to shift cost onto the consumer. So consumers are being asked to pay higher and higher premiums and the amount of the deductibles co-insurance, and co-payments are increased. So the costs aren't controlled, they're just being passed and shifted to the patient and the consumer.

Peter Robinson: George, those were your words. Are things better or worse than they were almost a decade ago?

George Halvorson: I think there are some tools now that are better than the tools at that stage of the game. But overall we're facing an explosion in healthcare costs. We're seeing double-digit inflation running year on year, twelve percent a couple years ago, twenty percent last year, probably twenty percent next year. The numbers are horrendous. We're very close to the point where in California the premium for a family of four, for full coverage, will exceed the full minimum wage.

Peter Robinson: All three of you are in agreement on that? Costs are suddenly up again and up in a major way. Okay. Let's ask the obvious question, which is, why? One likely answer is technology. On the other hand, in other markets, lots of other markets, computer markets, communications, technology has lowered costs. Why would it be the case that because we have new treatments and new medical techniques, cost would be increasing in the medical profession? Anybody want to take that one on?

George Halvorson: In other industries the technology is directed at improving the production of a fixed product. In healthcare, the technology changes the product--it increases the product, changes the nature of the product. So we have new procedures, new technologies, new approaches to care, and the care is getting better every year. We're performing miracles. But the technology that's coming to bear increases the cost.

Peter Robinson: Go ahead. Sure, Helen.

Helen H. Schauffler: I'd just like to add--I also think that the population's demand for services is really being stimulated by the industries themselves. The direct to consumer advertising on the part of the pharmaceutical industries is bringing patients in droves into physician offices asking for specific medications that may or may not be appropriate for them. And the physician who's now so dependent on his quality ratings for satisfaction has an incentive to write that script whether or not it's appropriate.

Peter Robinson: Alan, let me give you a statistic. In 1946 Americans spent seven times as much on food, beverages, and tobacco as on medical care. In 1996, fifty years later, they spent more on medical care than on food, beverages, and tobacco. Presumably the case is even more dramatic today. Now the question would be, part of the reason for that is all kinds of new treatments and new drugs and so forth, but is that per se a bad thing?

Alan Garber, M.D.: No of course it's not a bad thing and if you were given the choice between living today with today's healthcare or today's prices and living in the 40's with healthcare at prices of the 40's, I think almost all of us would choose today's healthcare at today's prices. But there's a fundamental issue here that distinguishes healthcare from other industries, and it's the reason why technology tends to increase expenditures, not necessarily prices but expenditures on health--and that is that most of us don't pay the full cost of any medical care that we consume out of pocket. So our decision about what to buy, how much to pay is very different than when we're spending all of our own money. If my patient's decision say to use Celebrex versus ibuprofen, it's…

Peter Robinson: Celebrex is a…

Alan Garber, M.D.: Celebrex is a new anti-inflammatory drug, something you might use for a sore knee or arthritis in any part of your body, heavily marketed particularly direct to consumers but also to physicians. And the manufacturer argues that it's less likely to cause side effects, particularly stomach problems than the traditional non-steroidal anti-inflammatory drugs which means ibuprofen or Advil, Naprosyn, drugs like that. Well the cost is at least ten times as high.

Peter Robinson: I can go to Costco or Price Club and get a big container of ibuprofen for about six or nine dollars, something like that--single digits as I recall. What's it going to cost me to get a big container of Celebrex?

Alan Garber, M.D.: You're talking about five hundred ibuprofens and probably the equivalent dosage there would be on the order of two hundred or three hundred dollars.

Peter Robinson: All right, so just gigantically more expensive.

Alan Garber, M.D.: That's right, and now if you're only paying a twenty-dollar co-payment, you might be more than happy to take the Celebrex, but if you were paying the entire cost out of pocket, you'd have a very different view and I'd argue you'd be much more likely to go to Costco and get that ibuprofen.

Helen H. Schauffler: May I ask one question because I think my answer to the question would be very different. I think that we're spending a lot more and clearly we have a number of new technologies and treatments and diagnostic tools that allow us to provide higher quality care. But if you look at what we spend and you look at the health of our population and you look at what other countries spend and that they in fact have better health outcomes than we do, I would say we certainly aren't using all those dollars very efficiently or effectively.

Peter Robinson: We've been discussing what's gone wrong with our healthcare system, but why did the situation actually improve after the crisis of the early 90's?

Title: Clash of the Titans

Peter Robinson: In the mid-1990's, costs did begin to moderate and come under control, so there are two questions. Okay, so two questions, the first question is what went right during that period? What was happening?

George Halvorson: What went right during that period was the health plans in the market place had enough market leverage that they could negotiate very low prices with the providers of care.

Peter Robinson: Including your health plan.

George Halvorson: There were two major drivers, one was the negotiations. So the fees came down for healthcare--hospital fees came down, medical fees came down, and those fee reductions offset the new drugs, the new technology, and so we had offsetting lines, the result in price was flat. And what happened was there's a natural economic reaction, the providers of care have now consolidated into very large, sometimes monopolistic organizations. And so across the country, instead of having thirty hospitals competing in a given community, you'll have maybe two or three…

Peter Robinson: Big operations.

George Halvorson: Yeah, very large operations and they basically can dictate price. If you go to Boston the average hospital increase last year was thirty-five to fifty percent in one year. And that's happening all over the country.

Alan Garber, M.D.: There's one thing I can add to what George said which is that it wasn't only consolidation, but we've actually seen a shrinkage in hospital beds and the capacity just isn't there. At a time when we have more people entering ages when they need hospitals but between 1975 and the mid 90's, the number of hospital beds per capita in the U.S. dropped in half.

Peter Robinson: Would you in a general sense describe that as a good thing--the industry over all became more efficient, it cut out over capacity.

Helen H. Schauffler: It went too far. The pendulum swung too far.

George Halvorson: The pendulum went too far. I think the--a lot of that consolidation came because the hospitals who consolidated wanted a change in each of the market place. So they took hospitals out of production in which case you have to pay a lot more for your hospital care.

Peter Robinson: So we saw prices moderating during the 1990's…

Helen H. Schauffler: And utilization dropped…

George Halvorson: And utilization dropped as well.

Peter Robinson: It was largely management techniques, the organization of the industry, the way in which the industry was managed. And so the second question is what then went wrong, or what ceased to go right? Was it simply that as many efficiencies as possible were squeezed out and the industry was left with nothing left to squeeze?

George Halvorson: There were a number of major drivers, but one of the biggest drivers was the discounts basically have eroded. So across the country, the hospitals…

Peter Robinson: Discounts, you have to explain to me what you mean.

George Halvorson: Hospital discounts that exist have gone away. The surgeons who used to deliver care to health plans for thirty cents, forty cents on the dollar, are back up to full fees because they've consolidated. It's hard to find a hospital anymore that has more than one cardiology group. So if you're a health plan, you want to deliver cardiology from a given hospital, you have to contract with that group.

Peter Robinson: And you pay them what they ask?

George Halvorson: Exactly. When you're in a monopoly situation, you get monopoly fees. And so the costs are going up, new drugs, new technology, and new monopolies are all driving up the cost of care.

Alan Garber, M.D.: It is true that there's been consolidation, but I wouldn't want to leave you with the impression that the story here is one of greater market power on the part of hospitals and physicians. What's really happened is the balance of supply and demand has shifted at the same time. When there's a lot of extra hospital beds, it's easy to get hospitals to agree to contracts with very low reimbursement rates. When there are very few, they simply will not strike the same deals.

Peter Robinson: On to what should be done beginning with something that almost was done.

Title: Death of a Health Plan

Peter Robinson: Hillary Clinton had a plan in the early 1990's, which was defeated--very narrowly defeated. And her plan called for a much larger government role in healthcare. Would we have been better off today, in 2002, if Mrs. Clinton's plan had been enacted in 1993 or 1994? Helen?

Helen H. Schauffler: You know what, what's interesting I think is that the system itself actually took on many of the characteristics that she proposed and we've had a situation where we have a smaller and smaller number of health plans competing in each market, which is really sort of the model that she envisioned. What it failed to do was to insure more people, because even when costs were down, the economic theory would have said if the costs are going down or the costs are controlled and it costing people--it costs less money for people to get insurance, the number of people who have insurance should increase. But in fact, almost the opposite happened and I'm not sure why. But costs went down and the number of uninsured just kept going up.

Peter Robinson: Right, so we now have about forty million Americans, which is roughly fifteen percent of the population, uninsured today. As recently as the mid 1970's, ninety-three percent of Americans were insured by private insurance. So you've got seven percent uninsured about a quarter of a century ago, rising to about fifteen percent uninsured today. Would anybody care to answer Helen's question, which is also mine; why did that happen? Alan?

Alan Garber, M.D.: The reason people become uninsured are highly varied and to say it should just be solely a function of what it costs to pay for health insurance would probably be a mistake. But let me answer your question with regard to today…

Peter Robinson: Right.

Alan Garber, M.D.: …what might it take to help more people get insurance? And I think there's wide spread agreement on a few things. One is that people who have to buy insurance on the individual market, that is they can't get it through their employer, tend to face worse choices and higher prices. Now actually Kaiser Permanente has been an exception in helping to make individual insurance available, but by and large throughout the country, it's a real problem if you have to buy insurance on your own.

Peter Robinson: But isn't that more expensive for you to provide?

George Halvorson: It's a little more expensive to enroll, but it's no more expensive to provide care.

Peter Robinson: Oh it isn't?

George Halvorson: No, the issue in the expense of providing care is whether or not you're getting a disproportionate number of sick people.

Peter Robinson: Isn't that what would be forced out into the individual market?

George Halvorson: One of the things that actually Kaiser has done is to create an Internet enrollment process for individuals and eliminate a lot of the distribution costs.

Peter Robinson: You guys making--well you're not for profit but in other words what I'm asking is if you're doing this, why isn't the industry generally?

George Halvorson: Well the costs are very high. Even if you buy an individual product from us, the premium costs are relatively high. As the economy weakens--it's a problem. One of my big concerns right now is that employers, as premiums are going up, are walking away from insurance. And so the number of uninsured is going to be higher.

Helen H. Schauffler: Traditionally people have gotten their insurance in this country through their employer, and it's the small employers--firms that have--really the real small firms, less than twenty-five employees, less that ten employees.

Peter Robinson: And they say we've had enough of this.

Helen H. Schauffler: The majority of them don't offer insurance. And so their employers are left out to the market and if anyone in your family has a chronic condition, you can't buy insurance. There are almost no rules on underwriting in the individual market--states have tried it and it hasn't worked. And so an insurance company can turn you down because you have brown eyes, because you, you know, you have a cough today, I mean it doesn't matter. And the only group that's protected as a class right now is pregnant women.

Peter Robinson: Do you wish HillaryCare had been enacted?

George Halvorson: The very first version of HillaryCare had a lot of merit. What happened was that they added so many bureaucratic over-layers to it that by the time they finished, it was an unworkable system. But I would have voted for the first version.

Peter Robinson: You would have?

George Halvorson: Yeah, the very first--managed competition giving consumers choices, given consumers choices based on information about care, outcome, satisfaction levels, that's a good market place.

Peter Robinson: Even though it's the government.

George Halvorson: Well the government was originally--originally the government was going to set up a marketplace and let consumers choose. Ultimately…

Peter Robinson: You had to go into that marketplace?

George Halvorson: The only rule though was that everybody had to be in but once in you could make all kinds of choices and there was a lot of flexibility…

Peter Robinson: You would have gone for that?

George Halvorson: …that worked for consumers. But the latter version of it was extremely bureaucratic and they were going to have major piles of politicians deciding what the benefits should be.

Peter Robinson: All right, on to what should be done option two, as proposed by one of our guests.

Title: The Accountant Will See You Now

Peter Robinson: We go from HillaryCare to HelenCare. Helen, describe your plan for California.

Helen H. Schauffler: It's called "CHOICE." Basically what it does is it requires that all parties that currently contribute to the financing of the system continue to do so and it creates two basic options for the consumer. One is that they can go to what would be a statewide network of any doctor, hospital, healthcare facility, that's licensed by the state for their medical care. And there's a standard benefit package. We actually started with the Kaiser benefit package because we thought that was one of the most comprehensive and it is clinically determined, which we thought was important. And then in the future we put in a mechanism for adding new benefits in a much more thoughtful, rational way, looking at the evidence and effectiveness and tradeoffs in costs and quality. So they can either do that or they can go to Kaiser. I mean, we said this model of the organized delivery system model of providing healthcare, what we call a staff or group HMO model, is really a wonderful way to deliver care and we don't want to take that away from people and Californians are very happy who are in that system. So we give people an option. Employers all…

Peter Robinson: We should stipulate this as you're designing a plan for California?

Helen H. Schauffler: For California but it could be in any state and it would look different in each state depending upon the extent to which these organized delivery systems existed. In some states, it may be just a statewide network. In California half of it may be organized delivery systems.

Peter Robinson: So fundamentally you've got the state establishing a statewide network…

Helen H. Schauffler: Yes, of private practicing physicians and healthcare facilities.

Peter Robinson: Right, and people may choose that, the expectation would be that that would be…

Helen H. Schauffler: It looks like an old Blue Cross plan where you can pretty much go to any doctor or hospital and you have cost sharing requirements but in this case, it's the state who pays them.

Peter Robinson: And all right so that what happens is that should there be any shortfall, if people's premiums failed to cover the cost, the state government would be on the hook to pick it up, is that right?

Helen H. Schauffler: Well it would except that the financing is so diversified. Employers pay less than they pay now but it would be about six percent of payroll--now they pay an equivalent of about seven percent of payroll. Consumers would pay only up to two percent of their income up to eighty thousand a year. So they would pay substantially less. We would use tobacco money to help finance this. We would use the safety net fund that currently covers uninsured patients. For each uninsured patient that becomes insured, we take eighty percent of the cost allocated for them and pay for their insurance premium.

Peter Robinson: So you've identified streams of revenue.

Helen H. Schauffler: So there's very few new dollars. It's just shifting the current dollars.

Peter Robinson: You've identified streams of revenue that the state already has coming in that you'll use to supplement the cost, but you're also making the bet, bet maybe the wrong word, but you're also making the assumption that because you're going to have a large operation, you'll be reducing administrative costs and there will be large savings in squeezing out the bureaucracy.

Helen H. Schauffler: Huge administrative savings according to the models that have been done. In addition, almost every--ninety-five percent of the population is covered, including the immigrants who are here regardless of their legal status. A much more comprehensive package of benefits than most people currently have now at a much lower cost to them--it's almost a win-win for everyone. The doctor's fees are also increased, so they'll be making money. The only people that lose is the insurance industry.

Peter Robinson: Okay gentlemen, you're now members of the State Senate of California, how do you vote? Alan?

Alan Garber, M.D.: Well let me just say I'm very nervous about any plan that claims that it's going to achieve savings by reducing administrative expenses. As Helen said, based on their models, this is feasible. And the issue is where are the data? And in fact the data on administrative cost are highly suspect in the first place because that is not broken up as an accounting category in a consistent way across institutions, much less across countries.

Peter Robinson: George go ahead, how do you vote on what Helen laid out?

George Halvorson: Well a couple quick comments. One is, we operate within Kaiser at about a five percent administrative cost because of the way we're organized. So it's possible to get to a fairly reasonable administrative cost. The major burden in the U.S. though is the seven thousand pages of Medicare, Medicaid regulations that put an immense burden on hospitals and clinics relative to paperwork and reporting. We can't make the assumption that if we go to a government system we'll get rid of the paperwork because the majority of it comes from there.

Peter Robinson: We've done HillaryCare and HelenCare, onto my proposal, MiltonCare.

Title: Patient Heal Thyself

Peter Robinson: Listen for just a moment to Milton Friedman: "Two simple observations are key to explaining both the high level of spending on medical care and the dissatisfaction with that spending. The first is that most payments are made not by the patient but by a third party--that is insurer or government. The second is that nobody spends somebody else's money as wisely or frugally as he spends his own." Milton's solution, "a medical savings account," I'm quoting him now, "that enables people to deposit tax-free funds in an account useable only for medical expense provided they have a high deductible insurance policy that limits the maximum out of pocket expense." So, you're on the hook, you can use tax-free money to pay routine medical expenses, office visits, prescriptions, and you insure yourself only for large events, which is roughly the way for example we run automobile insurance. You don't insure yourself against the cost of gasoline, you insure yourself against a collision. And we squeeze the third party payer problem out of the system. You are shaking your head in the most dismal way, what's wrong with this one Helen?

Helen H. Schauffler: Well I think we have learned through years and years of research that given the choice of spending money out of pocket to get a service like anything in primary care or preventive care. Even if it's as small as five dollars for that service, people are less likely to go get it. And so the whole--all the progress I think we've made in primary and preventive care would fall by the wayside under this plan because people would not be making good choices for their future health. They'd be using the system when they were sick, when they were injured, but they wouldn't go pay a hundred and fifty dollars out of their fund for their mammogram.

Peter Robinson: You realize you are being explicitly paternalistic here--you are explicitly saying you don't trust the American people to get the healthcare…

Helen H. Schauffler: No I'm saying the evidence suggests that people will not get the services if they have to pay out of pocket.

Peter Robinson: George, what do you think--what do you make of MiltonCare?

George Halvorson: I think there's an even bigger flaw in that model and the bigger flaw is that about seventy-five percent of the people only use about fifteen percent of the total cost of care.

Peter Robinson: Say that again.

George Halvorson: Seventy-five percent of the people use about fifteen percent of the total cost of care. And so most people…

Peter Robinson: So most people are getting routine and relatively inexpensive care.

George Halvorson: Right, and if they do--if they're a little more efficient in the use of that care because of a medical savings account, it will make little difference.

Peter Robinson: Small difference.

George Halvorson: Yeah, and at the other end of the continuum, one-percent of the people consume thirty percent of the care and they will blow right past any deductible in a medical savings account, and so it will be irrelevant for the people spending the real money.

Peter Robinson: So his plan doesn't even address the eighty-five percent expense?

George Halvorson: His plan would work just fine if everybody used an average amount of care. But there's a distribution curve that has a very small number of people using a lot of care and no one who is having a heart attack is going to negotiate with the doctor on the fees.

Peter Robinson: I'm hoping Alan this at least begins to address the third party payer problem you mentioned.

Alan Garber, M.D.: Let me say, Peter, that what Milton Friedman described as a concept has its flaws, but there are implementations related to that concept that build upon it that avoid some of the problems that both Helen and George have alluded to. And the market right now is producing insurance plans who are competing with Kaiser Permanente and other traditional insurers that have features of high deductible or catastrophic insurance that have things like medical savings accounts, but have other features as well that the employers who are the likely purchasers of such plans can build in. For example, they can have free preventive care as part of the plans. For example, they can have heavy management of care of people who go above the caps--that is the limits on out of pocket expenses. These patients who have severe diseases, who are spending a lot of time in the hospitals. I think the market is going to tell us what's going to thrive. The biggest issue actually is this issue of adverse selection. Will certain people who are low-risk be favored by such plans and then the traditional plans get stuck, and that's the term people would use, with the patients who have high cost--with the enrollees who have high costs. So I don't think we yet know that this will or will not work for sure.

Peter Robinson: Last question, because it's television. A decade from now, will we simply have muddled through so that a decade from now we'll have a healthcare system that looks pretty much the same and is still struggling to contain costs as best it can, or will we have had a fundamental reform in the direction of Helen's plan or for that matter, will things have changed fundamentally? George?

George Halvorson: I think a decade from now; care will be immensely better than it is now. I think care will be aided by computers; we'll have information about--medical information available to the doctor in the exam room…

Peter Robinson: And we won't be screaming about the costs?

George Halvorson: I think that we will have an increase in costs but we'll also have much better outcomes and we will have healthier people. I think it's going to get a lot better.

Peter Robinson: Alan?

Alan Garber, M.D.: I think that a decade from now we'll have much greater disparities in access to care and the people who have the best access will be much better off than they are today. And the people who have the worst access will at best be a little bit better off.

Peter Robinson: We have an optimist and a pessimist, Helen, what do you see?

Helen H. Schauffler: I think that we're not going to be able to control costs because the decisions that we have to make about rationing are ones that we refuse to consider. I think that we'll make incremental improvements in terms of access.

Peter Robinson: So we'll muddle along?

Helen H. Schauffler: I think we'll muddle through and I think that the only circumstances that will lead to any sort of comprehensive reform of the system will require a crisis and that's either a financial crisis in the healthcare industry itself or an enormously horrible bioterrorism event, which makes it clear that everyone needs access to care.

Peter Robinson: Short of a bioterrorism event, you don't expect such a crisis in the next decade? The people will be able to muddle through...

Helen H. Schauffler: I don't. And our system simply does not permit comprehensive change in the absence of crisis.

Peter Robinson: Okay. Helen, Alan, and George, thank you very much. I'm Peter Robinson for Uncommon Knowledge, thank you for joining us.