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Stanford Business magazine

 

Salvaging U.S. Health Care

Everyone agrees the U.S. system needs resuscitation, but reform is an elusive goal

By Margaret Steen

Health Care“It’s an issue that’s top of mind for all of our citizens and all of our business leaders,” said Steve Miller, MBA ’68 and executive chairman of Delphi Corp., the former parts unit of General Motors that is undergoing reorganization under bankruptcy court protection. “It’s a huge cost problem and a huge worry problem.”

But has the system unraveled far enough to force U.S. citizens, business leaders, and politicians to confront the difficult choices involved in fixing it? With the number of uninsured growing and insurance costs beginning to affect the competitiveness of American business, some speculate that the time may be right for health care reform to finally succeed. But there are also forces, from inertia to interest groups, aligned against fundamental change—and there is no consensus on what shape reform should take.

Experts cite several reasons that the U.S. system spends so much and has such rapidly rising costs. One frequently mentioned culprit is inefficiency.

“I can’t think of another industry that is as fragmented and poorly organized” as the traditional American health care system, in which doctors are paid for each procedure they perform, said Dr. Robert Pearl, SEP ’98, executive director and CEO of the Permanente Medical Group, the organization that employs Kaiser Permanente physicians and medical staff members who are paid a salary rather than a fee for service. (Kaiser Permanente is not affiliated with the Kaiser Family Foundation.) “In most communities across this nation the practice of medicine remains a 19th-century cottage industry, with doctors in small offices writing on pieces of paper,” added Pearl, who is also a lecturer at the GSB. Those notes are then unavailable when a patient goes to the local emergency room at night or on a weekend.

But although administrative costs—including marketing, claims processing, and “filtering out undesirable patients”—account for a portion of health care expenditures, there is no evidence that they’ve been rising faster than other health care costs, said Dr. Alan Garber, the Henry J. Kaiser Jr. Professor and a professor at Stanford Medical School and, by courtesy, at the Business School. He is also director of Stanford’s Center for Health Policy and a physician at the Veterans Administration Palo Alto Health Care System. “Getting more and maybe better forms of care” is a more likely culprit,” he said.

“Technology has done a lot of really fabulous things for health care. We have stuff now that even 15 to 20 years ago was inconceivable,” said Daniel Kessler, the David S. and Ann M. Barlow Professor of Management at the GSB and a senior fellow at the Hoover Institution. “But all that stuff costs real money.”

And while some expensive new technologies have saved or improved patients’ lives, others are no more effective than less expensive treatments. “We are paying for a lot of things that don’t work better than less expensive alternatives,” said Dr. Douglas Owens, professor of medicine at Stanford and a physician with the Palo Alto Veterans Administration. For example, people often use more expensive drugs to treat hypertension, but they don’t work better than less expensive, older alternatives.

The problem is that it’s not clear which technology is effective at saving or improving lives—and thus worth the cost. “It’s very hard to tell apart the good from the bad,” Kessler said. “That’s the fundamental problem in health care.”

There are other ways in which the U.S. health care system encourages wasteful spending. Economists say the current system insulates patients from the true cost of their care. “The system has promoted the psychology that health care shouldn’t cost anything,” Garber said. “At the same time, we’re delivering care that’s enormously costly.”

The fact that employer-provided health insurance isn’t taxed adds to the problem, Kessler said, creating “a huge incentive for people and their employers together to not be so concerned about the cost of insurance.”

The fee-for-service payment model used widely in the U.S. industry also creates distorting incentives, said Sara Singer, MBA ’93, assistant professor in the Department of Health Policy and Management at the Harvard School of Public Health and a senior research scholar at Stanford’s Center for Health Policy. “Insurance companies pay for services regardless of their value, which causes providers to provide more services, without necessarily encouraging disease prevention.”

The dilemma, then, is how to curtail costs without imperiling the innovation that has led to life-saving new technologies. “People are worried that they won’t get so many new drugs or new devices, but at the same time, they’re very worried about the rising cost of care,” said Victor Fuchs, professor emeritus of economics, who has proposed that a reformed system include an independent institute to evaluate the cost-effectiveness of technologies. “They can’t have them both. They can’t have a lid on rising expenditures and all those new technologies.”

Miller goes further, saying, “I’d suggest we admit we have to ration health care.”

Without reining in the costs, experts fear, it will be nearly impossible to expand access to health insurance to everyone. In fact, Garber said, extending insurance to more people without containing costs will simply make the problem worse. Opinion polls show that the public is concerned about health care, and this concern has been reflected in press coverage and the presidential campaign. So is the time right for meaningful reform? There are some reasons to think so.

Patricia Mintz, MBA ’80, an independent consultant who works with foundations, local governments, and nonprofits to provide health coverage to low-income populations, said the lack of health insurance is increasingly affecting the middle class, not just poor people. “You’re one job loss away from not having health coverage for your family.” It’s also a growing concern for the self-employed.

The escalation of costs is putting pressure on the employer-based system, as well. The longstanding link between employment and health insurance is partly a consequence of business’ need to compete for workers during a period of labor shortages and wage controls in World War II. W. Richard Scott, professor emeritus of sociology, who has studied the decline of the U.S. health care system, said the system is “one of those American compromises,” based partly on resistance to a government-run program. 

Although several experts point out that employers pass the cost of care on to their employees (through lower wages) and their customers (through higher prices), rapidly rising costs are still a strain for employers—a strain that threatens the country’s economic growth. “As U.S. companies search for savings, they build plants in other countries,” said Miller, who writes about his career trying to rescue American companies with unsustainable costs in a 2008 book, The Turnaround Kid.

Two upcoming events may push the action along, as well. First, Medicare will face a crisis as the baby boomers become eligible for the program. “If you look at Medicare expenditure projections, it’s a very frightening picture for the federal budget,” Garber said. “At some point Congress will have to do something, and the question is when. It could be during the next presidential administration.” The solutions—so politically unpalatable that few politicians are openly discussing them now—range from cutting benefits to raising the eligibility age to charging wealthier seniors for more of their care. If nothing is done, Medicare will consume a greater and greater portion of the federal budget.

In the next few years, it should become clearer whether the Massachusetts health care plan, which was passed in 2006 and aims to provide health care to all residents, is working. “I think that people are looking now toward Massachusetts and saying if it works, then maybe it will work nationally,” Singer said. “If the insurers can’t hold down the premiums of the plans in Massachusetts, the system will unravel. If this happens, I think people will get scared about the prospects for national reform.”

Just what form would national reform take? Few powerful players are talking about a national single-payer system, since it would up-end so much of the current system. “You can’t get there from here,” Scott said.

Alain Enthoven, the Marriner S. Eccles Professor of Public and Private Management, Emeritus, at the GSB, wrote a paper for the Committee for Economic Development, a business-sponsored think tank, proposing a model in which everyone would have a range of choices for health insurance. An employer or the government would pay the cost of the lowest-priced plan—probably a health maintenance organization, or HMO—and individuals would pay the difference in cost for higher-priced plans. A number of large employers, including Stanford, already use a system like this, Enthoven said, and they have found that most employees choose from among the lowest-priced plans. Enthoven reported that in 2005, only 13 percent of Stanford employees chose the most costly plan. If that preferred provider organization (PPO) plan were the only one the University offered, Enthoven said, it would have cost the University an additional $44 million per year.

This shows that when choosing insurance plans, at least, people do tend to choose less expensive care when they are not insulated from the costs. Some proposals would extend consumer choice to the point of care, not just to insurance plans. But not everyone is convinced that would work. “At the point where you’re having a heart attack, you’re not going to say, ‘Gee, where’s the cheapest place for me to get care?’” Mintz said. “The incentives need to be aligned for physicians to make the best decisions.”

Kessler suggests offering tax credits to low-income people to help them afford insurance and providing public subsidies for the chronically ill—a population for whom traditional health insurance doesn’t work. This would expand the number of insured people, though it wouldn’t provide universal coverage.

Kessler thinks reform may come from a lot of small changes—eliminating the tax advantage for employer-based insurance, changing the fee-for-service structure, emphasizing preventive care and disease management—rather than one big reform package. “It’s going to be a bunch of little changes, each one of which fixes a hole.”

There is no consensus on which of these many ideas would work best to fix the system. And that’s one reason many experts are hesitant to predict fundamental reform anytime soon.

In addition, despite the high numbers of uninsured, the fact remains that the vast majority of Americans do have health insurance. People with insurance “don’t want to take a chance on some unknown system,” Fuchs said, which means the proposals from leading presidential candidates are basically designed to prop up the current system, not to fundamentally change it.

Preserving what people already have—especially their choice of doctors—makes problematic using some other countries’ systems as a model. “Our society places enormous value on individuality,” Scott said.

“People have been saying for a long time that it can’t go on much longer this way,” Enthoven said. But it’s not clear that public anger at the situation has reached the point that will force fundamental change.

Although employers are feeling pressure due to rising costs, many business leaders resist the idea of government intervention. “They’re very worried that this will become the post office,” Miller said.

Health care is definitely attracting the attention of CEOs in a way that it didn’t in the past. But an employer with lots of retirees who have been promised health care has different concerns than one with a small number of relatively young, healthy employees. “The employers are up in arms, but they have not yet settled on a solution they can all endorse,” Garber said.

Finally, there’s the issue of money. Expanding coverage will cost more, and given the shaky state of the economy, finding money to fix the system could be a tall order. Insurance and pharmaceutical companies will resist changes to the system that cut into their profits. And, “in general people’s philosophy is that they don’t really care who pays, as long as it’s not them,” Pearl said. This is one reason that “no action is the most common outcome in this politically difficult arena.”

Some proposed reforms might improve Americans’ health but not save much money in the short term. For example, proponents of reform often argue it will save money since the uninsured won’t go to emergency rooms for routine care. Although there would be some long-term savings, initially the reduction in emergency room care costs would be offset by the newly insured going to get care they hadn’t been able to afford previously, Singer said.

Some improvements in the health care system could save money, but often in fee-for-service medicine, at the expense of the people who spent it. For example, Pearl said, when doctors invest in a new technology that reduces the number of procedures they perform, they earn less money while insurance companies benefit financially.

Fuchs believes that in the short term, chances of significant reform are “virtually nil.” In the next 5 to 10 years, he says, the chances of change are “no better than 50-50” unless a crisis gets Congress’ attention. But over the long term, “major reform is practically inevitable.”

What form that major reform will take, of course, is still unclear.

“There’s nothing that’s going to answer this or make it go away,” Kessler said. “The tension between the benefits of new technology and health care cost growth is here to stay.”