Rationing Health Care: What We Already Do, Done Better

It's a dirty word that no politician dares to utter, but any discussion of health reform, and of cost containment, demands that we talk about rationing. As stated by ethicist Peter Singer argued this past summer "The debate over health reform in the United States should start from the premise that some form of health care rationing is both inescapable and desireable. Then we can ask, What is the best way to do it?" My goal with this post is to better explain rationing, show why it need not be a dirty word, and show how we already engage in health care rationing everyday.

Let's start our discussion in Oregon circa 1987. Oregon's Medicaid program only covered adults with earnings below 60% of the federal poverty level (FPL), but the state wanted to find a way to cover everyone up to 100% FPL - but the state could not spend any additional money. A state commission was formed to determine how to achieve this goal. The commission looked at all services provided by Medicaid and divided them into approximately 700 treatment groups. The groups were then ranked based on medical and cost effectiveness. Treatments that scored well were given a low number, treatments that fared poorly were assigned a high number. Figure 1 shows the treatment groups on the horizontal and the income level of the population on the vertical - the grey area represents treatments that are not covered.

Oregon was providing access to all 700 treatment groups to every Medicaid recipient with earnings below 60% FPL, but nothing was covered for those earning 60% FPL or above (the grey area in figure 1). The Oregon legislature decided that in order to provide health insurance to everyone below 100% FPL they would stop covering the least effective (high numbers in figure 1) treatments. The state stopped covering treatment categories that fell above treatment group 550 (figure 2). This saved enough money that the state was able to provide coverage for treatment groups 1 to 550 for everyone earning below 100% FPL. It was explicit rationing of care, those services deemed to be the least medically or cost effective were dropped, but the state was able to increase the number of people covered by Medicaid by 50%.

So what are the national implications of all of this? Imagine that the 700 treatment groups identified in Oregon were extrapolated to the entire country. Currently, those with good insurance, in Medicare, in Medicaid (other than in Oregon), and those who are wealthy have access to all 700 treatment groups. But access to those treatment groups declines as income (and likely the quality or presence of insurance) drops. Figure 3 shows how health care is already rationed in the United States everyday. The poorest Americans, those lacking adequate health care, have limited access to any of the 700 treatment groups. As income rises so does access to care. This is rationing, but unlike the Oregon experiment, this rationing is driven entirely by one's ability to pay for care. Rather than rationing to ensure that everyone has equal access to a set standard of care it is rationing that provides some unfettered access to care while others can access very little. And it's all based on ability to pay, not on need.

The solution, based on the Oregon example, would be to limit access to the least effective services, and with the money saved, extend equal coverage to everyone (figure 4). In Oregon, the state was dealing with a finite pool of funds for the Medicaid program. Nationally, we would be dealing with a finite pool of funds drawn from the population via taxes to fund universal health care. The inclusion of the entire population in the purchasing pool would likely mean fewer excluded treatments.

In a prior post I argued that the only way to effectively control costs was to implement a single-payer model of health care delivery in the United States. I cited the McKinsey Global Institute's finding that America spends 30% more on health care than we should - largely due to overuse of services. Ending the overuse of services, and therefore saving substantial sums of money from our $2.5 trillion health care economy can only be achieved effectively via single-payer. Achieving those cost savings would require empowering some governmental agency to review service use and determine which treatments are most and least effective, and therefore which services to be covered with our finite resources. It would be explicit rationing, but unlike our current approach to rationing health care, it would be based on providing equal access to the same standard of care – regardless of income.

Special credit goes to Donald Barr and his terrific book “Introduction to U.S. Health Policy” for key information and concepts used to inform this post.

The Economic Case for Single-Payer Health Care Reform

The Center for Budget and Policy Priorities (CBPP) has provided compelling justification for comprehensive health care reform – not the insurance reform that is likely to emerge from the House and Senate, but true health care reform. In their report “Updated Long-Term Fiscal Deficit and Debt Projections,” the CBPP used data from the Congressional Budget Office to estimate long term debt, deficit, and spending trends for the federal budget – the findings show that 1) the U.S. is on an unsustainable spending path and 2) it all comes down to the rising cost of health care.

“The main driver of the long-term fiscal imbalance is the rising per-person cost of health care, which will increase spending and reduce revenues…”

How will it reduce revenues?

“…as health care costs rise, workers are likely to receive more of their compensation in the form of tax-exempt health care benefits and less in the form of taxable wages, so total revenues decline.”

This assumption is confirmed by the fact that employee health care costs have increased by 130% in the past 10 years even as our wages have barely kept pace with inflation. As our wages shrink, so does our taxable income and therefore federal tax revenue.

But it gets worse, because we all buy health care from the same market of providers and facilities the forces driving up private health care costs are also driving up the cost of Medicare and Medicaid. The CBPP estimates that those two programs will grow from their current 5.1% of GDP to 12.8% of GDP by 2050 (Figure 2) – put another way, these programs will more than double in expense in relation to total economic output. Currently, spending on Medicare and Medicaid is equal to 32.7% of all federal revenue ($0.33 of every dollar the government raises via taxes is spent on those two programs), by 2050 that will rise to 67.7% of all federal revenue – meaning that every other federal obligation, including Social Security and national defense, will be fighting for the remaining 32.3% or we’ll have to engage in heavy borrowing or drastic tax increases.

In short, if we are to enjoy a sustainable and healthy economic future, we need to bring down the cost of health care and control its meteoric annual cost increases.

Neither the House, the Senate, nor the President have proposed any such reform.  Rather they have focused on ways to expand coverage while shifting costs around to create the illusion of a decreased federal burden. But the problem with cost shifting is that it does nothing to control costs, nor does it change the ultimate trajectory of rising costs system wide. System wide change is what is needed.

Consider this – in 2007 Canada spent an average of $3,173 per capita on health care, the United Kingdom spent $2,560, and Germany $3,171. The U.S. spent $6,096 – starting to get a sense of the problem? Between 2003 and 2007, US health care spending grew at a rate 22% faster than Germany and Canada and twice as fast as in the UK. As a percent of overall economic output in 2007, health expenditures accounted for 10.1% of GDP in Canada, 10.4% in Germany, and 8.4% in the UK. In the U.S. the figure was 16%.

Finding a New American Way
The U.S. needs to find a way to effectively control costs and reduce per capita health expenditures; our economic health depends upon it.

Canada, the UK, and Germany have all established their own unique approach to health care organization, delivery, and cost containment – but there are many similarities.

Canada employs what is commonly referred to as a single-payer system. Universal health care is funded via taxes paid to the federal and provincial governments. Providers and health care facilities are private, but the government, operating as a monopsony, sets prices. Every province establishes an annual budget for health care; if a provider or hospital exceeds the allotted budget then no additional money is provided. This approach forces coordination of care and the efficient use of resources to ensure that allocated funds last the year. It also means that sometimes elective surgeries and other non-emergency procedures are delayed until the next budget year.

In the UK one will find what is commonly referred to as socialized medicine. Universal coverage is funded via taxation. Hospitals are owned by the National Health Service, specialists are employed by it, and general practitioners accept a negotiated capitated (pre-payment) salary for caring for patients. Health care organization, delivery, and resource allocation are handled by regional health authorities. There is an annual budget for health care. The system is marked by long wait times, and service delivery is often determined based on strict cost/benefit analysis, but everyone is covered, costs are contained, and the World Health Organization ranks the UK health system as 18th in the world (the U.S. is ranked 37th).

In Germany, universal health care is funded via payroll taxes paid by employers and employees. Insurance is provided via non-profit “sickness funds” or insurers. Coverage for kids is funded via general taxes and retirees and the unemployed pay for insurance via deductions from their respective benefits. Germany uses the power of regulation to maintain costs, sickness funds cannot raise premiums at a rate faster that wage growth, and there are limits set on how much hospitals and providers can bill in a year – essentially an annual health budget. If a doctor were to prescribe medication that exceeds the average in his area he would be required to partially cover the cost.

All of these systems share similarities – they all provide universal coverage, they all rely on one system to provide care (unlike the U.S. where we have Medicare, Medicaid, SCHIP, Employer Sponsored Insurance, Large Group, Small Group… need I go on), and they all rely on the government – either as payer or regulator – to handle the distribution of resources. Because each of these nations establish variations of an annual health budget patients are viewed differently as well. In the U.S. every patients and every procedure provided is a source of revenue (provide more services, get more money) – in Canada, the UK, and Germany every service provided represents a depletion of limited funds. This forces hospitals and physicians to prioritize and coordinate care. Do they ration? Certainly, but its rationing based on assessed individual need relative to overall needs and available resources.

We ration in America as well, but it has nothing to do with need. Rather we ration based on an individual’s ability to pay. Forty million lack insurance and millions more have limited access to care due to high deductibles and other out of pocket expenses. There is another important point about these countries; because there is a single source of payment there is no opportunity for cost shifting. In the U.S. if the government cuts Medicare reimbursement hospitals or providers will try to shift the cost onto the privately insured. If an insurer raises prices, an employer will negotiate lower prices by cost shifting to employees in the form of higher co-pays and deductibles. The end result of all of this shifting means that no money is actually saved system wide, it’s just shifted from one payer to another – this cannot happen when you have one payer and a set budget.

The fragmentation of our system and the fact that we spend more than any other nation might be tolerable if we were benefiting in some way. Are we healthier? Do we get extra benefits for all the extra spending? The simple and clear answer is “No.” A recent study by the McKinsey Global Institute (MGI) found that the U.S. spends about 31% more per year on health than would be expected based or our wealth, cost of living, and health. In a $2.5 trillion health care economy that translates into $775 billion in excess spending.  Why do we over spend? We have higher administrative costs owing to the fragmentation in our system, but mostly the problem is the manner in which we pay for services. Since every patient and procedure is a source of revenue providers over-provide. Because our insurance frequently has no limit on the utilization of services, we over-consume. According to the MGI report:

“The higher utilization of care may be attributable to a number of factors such as greater patient convenience and a reduction in risks associated with less-invasive surgery. It also appears likely that this increased usage relates to the fee-for-service nature of outpatient care reimbursement, which creates incentives to providers to render more care... From a supply perspective, outpatient care, particularly for specialist care and diagnostic procedures, is very profitable.”

Why Single-Payer?
What approach should we take? Canadian style single-payer is the only real option as it would preserve our private system of care delivery (hospitals and physicians).  The German model seems appealing at first, but in the end it would be easier to eliminate the health insurance industry than it would be to turn insurers into heavily regulated non-profit entities. So single-payer, like Canada, and like Medicare. Reducing health care costs by 30% would have a dramatic impact on our economic security. Health expenditures would shrink to $4,267 per capita and 11.4% of GDP, we would save over $700 billion in a single year (roughly the size of the American Recovery and Reinvestment Act of 2009). By setting an annual budget we could better control the annual growth in federal health care spending and alter our current unsustainable path. Though we would still be saddled with a need to pay interest on our accumulated debt, we would no long accrue new debt to fund Medicare and Medicaid. States would benefit as well. Medicaid consumes approximately $0.25 of every tax dollar raised by a state.

Replacing Medicaid with a new universal federal program would eliminate that funding need and immediately solve nearly every state budget shortfall. Although we would still need to fund the new program via taxes, we would no longer be paying health insurance premiums and neither would our employers so our wages would rise and no longer be depressed by the rising cost of health care. At the state level, there would no longer be taxes to support Medicaid. At the federal level, there would be no taxes to support Medicare. Instead, a new tax would fund a health care system that costs approximately 30% less than the current system – and everyone would be covered. Sound too good to be true? Tell that to Canada, the UK, or Germany.

So how do we do it? The only way that we can bring health care spending under control, and therefore be able to provide coverage to everyone, is if we move beyond our aversion to government intervention. Only government can effectively allocate our health care resources in a manner the responds to need rather than wealth. Only government can establish an annual health care budget and ensure that facilities and providers abide by the annual limits. Only government can affect our change from a system driven by the perverse incentive to deliver care as a means to generate revenue to a system based on the proper management of care in order to conserve resources. The logical approach would be to restructure Medicare and make it universal. And it must be universal. The only way to get the public on board, and to accept the change, is to have us all in the same system, all guaranteed the same level of care, all sharing the same resources, and the costs. This is what other nations do, and what we must do.

Does Harry Reid Really Plan to Include a Public Option... and Just What Would the Option Be?

Check out the FreeStater blog for my take on Senate Majority Leader Harry Reid's latest expression of support for a "public option."

Richard Nixon: Health Reform Visionary

In 1974, President Richard Nixon addressed Congress on the issue of health care. Said Nixon “Without adequate health care, no one can make full use of his or her talents and opportunities. It is thus just as important that economic, racial and social barriers not stand in the way of good health care as it is to eliminate those barriers to a good education and a good job.”

Nixon went on to explain that the rising cost of health care placed too many American families in danger of being wiped out by a catastrophic illness. Our health insurance system was flawed according to Nixon because too many Americans were uninsured and unable to obtain insurance due to low pay, unemployment or pre-existing conditions and still millions more who had coverage lacked “balanced, comprehensive and fully protective” coverage.

To address the problems, Nixon proposed the Comprehensive Health Insurance Program (CHIP). Nixon pledged that CHIP would allow every American to obtain comprehensive insurance, that no American would pay more than he or she could afford, and patients will be free to choose their doctors. According to Nixon, CHIP would build on America’s existing private insurance market, promote effective use of health care resources, and use public funds only when necessary – all without requiring new taxes.

CHIP contained three key elements: Employee Health Insurance, Medicare, and Assisted Health Insurance.

• Employee Health Insurance – Employers would be required to provide health insurance to their employees, these benefits would need to meet minimum benefit requirements set by the federal government, and employers would be required to cover 75% of the cost of the insurance premium. There would also be a limit placed on annual out of pocket expenses.
•  Medicare – CHIP would reform Medicare to add coverage for outpatient prescription drugs and it would place an annual limit out-of-pocket expenses. Medicare would also be required to meet the same minimum benefit requirements established for employers.
•  Assisted Health Insurance – CHIP would have replaced the Medicaid program with a new federal/state program to provide health insurance to everyone not covered by Employee Health Insurance or Medicare. This program would also be available to those with pre-existing conditions who were unable to obtain care from private insurers. Premiums and out-of-pocket expenses would vary depending upon income with low income persons paying nothing. The program would have the same minimum benefit package as Employer Health Insurance.

Nixon argued that CHIP would require no new taxes and would save families money. To better control ever rising health care costs CHIP would rely on Health Maintenance Organizations that would end the days of fee-for-service medicine that incentivize the overuse of service and instead rely on prepaid arrangements with physicians and other providers. CHIP also would create Professional Standard Review Organizations (PRSOs), staffed by physician, an empowered to review best practices and find ways to reduce needless hospitalization.

Every person participating in CHIP would receive a Health-card. Modeled after a credit card, it would offer proof of insurance and provide information on blood type and any medical conditions or drug allergies that may be important to know in an emergency.

The Watergate scandal that ended the Nixon presidency also ended CHIP. Congress had no interest in considering comprehensive reform proposed by a President likely to be impeached.

But good ideas never die. Look to the legislation currently being considered in the House of Representatives or being debated in the Senate Finance Committee and you cannot help but see Nixon’s CHIP. Legislation in the House and Senate rely on employer mandates and establish minimum benefit requirements, the House legislation is likely to include a so called “public option” which is exactly what Assisted Health Insurance under CHIP was, both the House and Senate are proposing to create review bodies to promote efficient and effective resource use, both are likely to prohibit insurers from denying coverage based on pre-existing conditions, and both will rely almost exclusively on the existing private insurance industry to provide coverage.

There are some differences – Nixon wanted CHIP to be voluntary for individuals, no one was required to purchase insurance, but the House and Senate will likely include individual mandates. Neither the House nor the Senate will establish annual caps on out-of-pocket expenses for Medicare beneficiaries and prescription drug coverage was added in 2003 (30 years after CHIP proposed adding it). The House and Senate will also maintain the Medicaid program and in fact expand it. And HMOs have long since fallen out of favor – quite unfairly.

But these differences do nothing to diminish the fact that we are today engaged in a great debate over whether to at long last enact health reform first introduced by President Nixon in 1974. It’s not the first time, or even the second time, that we have considered CHIP – President Clinton’s Health Security Act, introduced in 1993, was essentially Nixon’s CHIP, right down to the health card and reliance on HMOs. Clinton dropped the public option and added an individual mandate, but otherwise it was very much CHIP.

So here we are in 2009 considering a reform first proposed in 1974… at what point does a proposal become too old to be deemed dangerous or radical? Nixon’s Comprehensive Health Insurance Program was a good idea in 1974 and it is a good idea today. We may never see single payer in the US, but we could move closer to the German model via the reforms currently on the table.

Hyper-Partisanship and the Weakening of Democracy

Charlie Cook at National Journal offers some great reasons for redistricting reform. From Cook: "When I first came to Washington in September 1972, Congress abounded with conservative and moderate Democrats, as well as liberal and moderate Republicans. These lawmakers provided the ballast that prevented their parties from going to extremes. They kept the Democrats from driving into the ditch on the left and steered Republicans away from the one on the right."

The lost center in American politics is poisoning our system and weakening our democracy. It turns legislating into a winner take all war rather than the exercise in compromise that our framers intended. When our representatives engage in this brand of politics it discourages moderate voters and emboldens partisan voters - the result being an even more partisan Congress. As Congress becomes so hyper partisan normal rules of procedures are ignored and bypassed. Sarah Binder and Michael Mann at Brookings have a great review of the 110 Congress and show that the use of restrictive rules of debate and amendment in the House, bypassing the normal committee process in the House and Senate, and simply ignoring the Conference process have become the norm. The practices were begun by the Republicans in 1995 and have only gotten worse.

These abuses of process reduce the minority party to a non-entity with little recourse but to serve as an obstructive force. The result is a zero sum game politics where each legislative battle is treated like an all out war. These legislative battles then influence the politics of the voting public. Republican and Democratic voters each view the other as a threat, one that cannot be tolerated, can never be accepted as legitimate. Anger and hate naturally follow. Ends justify the means politics ensue as each side views its policies as superior and noble.

The threat by the Democrats to use reconciliation to pass health care reform is just one more example of our poisoned politics. I have taken serious flak for my support of Max Baucus and his efforts to forge compromise health reform. To be sure, the Baucus plan is flawed and would not bring the fundamental reform we need. So why do I support it? Because Baucus has demonstrated a clear respect for the process of legislating. He has sought compromise and he is seeking a bill that can pass without bypassing the normal procedures of legislating. Baucus represents a Congress of a bygone age... and the best hope of bringing that Congress back. In the process, he may just save our politics. In the end, that is far more important than any one single piece of legislation.

Health Reform's "Red" Herring

As Congress returns from a summer recess of heated town hall protests and even hotter political rhetoric, health reform is on the ropes. An NBC News poll tells the tale – 54% of the public are more concerned that the government will go too far with reform and make quality worse than are concerned that government will not do enough. In April, a quarter of Americans thought that President Obama’s reform plan was a bad idea while one-third considered it to be a good idea. Today, roughly a third still considers it to be a good idea, but fully 42% now think it is a bad idea. According to Gallup, President Obama's approval rating has fallen farther and faster than nearly all presidents since Harry Truman. This is a key measure as studies have demonstrated that a President’s legislative success is more influenced by his standing with the public than by whether his party controls Congress.

President Obama, his surrogates, and Congressional allies attribute this decline in public confidence to “misinformation” and “scare tactics” employed by organized interests intent on derailing reform. Town hall protesters and numerous conservative critics have attacked Congressional reform proposals as “socialism” and even compared them to National Socialism under Nazi Germany. Another protester accused House Majority Leader Steny Hoyer and Speaker Nancy Pelosi of aiding the President in “spiraling us rapidly toward socialism.” When a protester in Massachusetts asked Rep. Barney Frank how he could support “Nazi policies,” Frank simply dismissed her with a joke. But such a line of attack is no joke. Rather than demonstrating a preparedness for such attacks, the White House and Congressional leaders have reacted to these criticisms in a disorganized and poorly coordinated effort and the lack of any coherent response allowed critics to undermine public confidence in reform. As a professor of American politics and a health policy scholar, I cannot help but ask how the White House and Congress were caught so unprepared for this fight.

Look at the lessons of history: When President Franklin Roosevelt was considering the inclusion of national health insurance as part of the New Deal, American Medical Association (AMA) president Dr. Morris Fishbein denounced even plans to promote voluntary private insurance as “socialism and communism.” In 1948, the Federal Security Agency (precursor to the Department of Health and Human Services) issued “The Nation’s Health: A Report to the President” which determined that only national health insurance could effectively organize the American health care system and create a stable financial basis for funding health care. Republican critics in Congress attacked the goals of the report in eerily familiar terms. “Wherever some form of dictatorship prevails in government, there we also find some manifestation of socialized medicine… Communism, Fascism, Nazism, Socialism – all are alike in that they enforce a system of State Medicine.” When President Truman introduced national health insurance legislation in 1948, the AMA hired a public relations firm to derail the plan. The objective - keep public opinion hostile to reform. Clem Whitaker, owner of the firm hired by the AMA, made the strategy clear: “All you have to do is give it [reform] a bad name… America is opposed to socialism so we’re going to name national health insurance “socialized medicine.” The U.S. Chamber of Commerce published a report titled “You and Socialized Medicine” warning that any form of compulsory health insurance served the Democrat’s plan to impose socialism and totalitarianism. Three-quarters of the American public supported national health insurance in 1945; by the end of 1949 less than one-quarter supported such reforms. Truman lamented how critics had “distorted and misrepresented” his proposal. Sound familiar? Truman attempted to salvage his reforms, but the die had been cast.

In the decades since, all significant proposals for health care reform have been met with counter offensives by some combination of interest groups. The players have changed, but their strategy has rarely wavered – any manner of significant health reform is labeled “socialism.”

Even when reformers sought to minimize the government’s role in any reform, the line of attack remained. When President Eisenhower endorsed publicly financed catastrophic insurance, in an effort to protect the private insurance industry, the AMA denounced this modest reform as socialism. So effective has the “socialism” strategy been, that every serious health reform proposal since the 1970s has been premised upon a reliance on the private health insurance market. Even the late Senator Ted Kennedy, one of the nation’s staunchest advocates for universal health insurance, abandoned a single payer, Medicare-like approach, in the late 1970s. From 1979 through to the current debate, Kennedy advocated reform based on the private market. In 1993, President Bill Clinton’s Health Security Act sought to achieve universal coverage via a combination of individual and employer mandates. In a conscious effort to avoid government financed reform it relied almost exclusively on private insurers – yet it was almost immediately denounced as socialism, or "creeping socialism."

Of the current reform proposals being given serious consideration in the House and Senate none advocate socialized medicine. In fact, for good or for ill, all enhance the role of private insurers and our current employer-based approach to insurance delivery. Yet, the socialized medicine and “Nazi policy” critiques have reached a fever pitch. Reform proponents have largely dismissed such protests as the rhetoric of an uninformed fringe movement. But those who dismiss this line of attack ignore a key lesson from past health reform battles – the strategy works and should be taken seriously. Fears of “death panels” or rationing can all be linked to the images of compassionless or dispassionate care evoked by raising the specter of socialism or Nazism

Given its potency, reform proponents must defuse the power of the socialized medicine label. One approach could be pointing out that when it came to ensuring that our veterans receive the high quality care they deserve we opted for socialized medicine in the form of the Veterans’ Health Administration (VHA). The VHA represents socialized medicine in its purest form, government ownership of the facilities and employment of the providers. Proponents might remind voters that to guarantee access to health care for our seniors we adopted quasi-socialized, or single-payer, medicine in the form of Medicare. Seniors receive care from private hospitals and physicians, but they are insured by the federal government. Both programs consistently receive higher customer satisfaction ratings than do private insurers and do a better job of controlling costs while ensuring access to care - hardly indicative of compassionless “socialized medicine.” It’s no coincidence that some of the most vocal town hall protesters are seniors fearful that reform would undermine the Medicare coverage they treasure.

Every major defeat of health care reform has been followed by roughly 15 years of inaction or only minor reforms. That’s 15 years we cannot afford to lose. With 47 million uninsured, millions more under-insured, and with rising health care costs threatening our long term financial security, we must reform our health care system. A recent study by the Commonwealth Fund determined that America trails the UK, Australia, Canada, Germany and New Zealand with regard to quality, access, efficiency, equity and healthy living. If this effort does fail, it will not be because opponents found a new means to stifle reform. It will be because the President and his allies were caught unprepared to counter a line of attack that is now old enough to qualify for Medicare. Historians and political scientists will be left to wonder how they failed to prepare for this fight.