Keeping Afloat tes V The United Sta ersus Canada

By Uwe E. Reinhardt

For most of the 20th century, Americans basked in the unquestioned faith that theirs was the best in the world. That belief was not totally unfounded. No nation trains physicians better than the United States. Its set the standards in terms of techni- Fcal sophistication and sheer luxury of accommodation. The nation’s pharmaceutical, biotech and medical-device industries remain global leaders, both in terms of technology and the sheer volume of inno- vations. Finally, for terminally ill patients who can afford the bills, America is often viewed as the last hope. Doubts, though, are surfacing. Most notably, the rapidly rising cost of health care has begun to price more and more Americans out of the private system. Less noticed but equally disturbing, there is reason to believe that the average quality of care is slipping. the cost Measured in terms of purchasing power, Americans spent almost twice as much per capita on health care in 2003 ($6,100) as Canadians ($3,200) and Germans ($3,000), and half again more than the Swiss ($4,100) – even though both Germany and Switzerland have much older, and thus medically needier, populations than the United States.

36 The Milken Institute Review william rieser william

Second Quarter 2007 37 rationing health care Remarkably, these enormous variations in According to the widely respected Milli- spending don’t track independent measures man Medical Index, the average American of the quality of care, medical outcomes or family with private insurance consumed even patient satisfaction. Indeed, a study by $13,382 in medical services in 2006. Yet about Katherine Baicker (Harvard) and Amitabh one-third of American families have an in- Chandra (Harvard) suggests a negative corre- come below $40,000 per year. Thus, it is not lation between a state’s spending surprising that the number of Americans per person and an independent ranking of without health insurance has risen inexorably quality of care. The authors conclude that during the past two decades, even during pe- states relying more on general practitioners riods of economic boom. The total stood at tend to have more effective care and lower 37 million in 1993; it is now 46 million and spending than states more dependent on expected to exceed 50 million within a few medical specialists. years. In the Sun Belt states, roughly a quarter This paradox extends to international of the population is uninsured. comparisons. A 2005 survey by Common- wealth Fund found that 34 percent of Ameri- CITIZENS’ VIEWS ABOUT HEALTH SYSTEMS can patients reported that they had been

SYSTEM WORKS FUNDAMENTAL SYSTEM NEEDS victims of various sorts of medical errors, WELL, ONLY MINOR CHANGES TO BE COMPLETELY CHANGES ARE NEEDED ARE NEEDED REBUILT compared with 27 percent in Australia, 30 percent in Canada, 23 percent in Germany ALL ADULTS, 2004 Canada 21% 63% 14% and 22 percent in Britain. And many of those United States 16% 47% 33% errors are far from trivial: a 1999 report by the PATIENTS WITH HEALTH PROBLEMS, 2005 National Academy of Science’s Institute of 21 61 17 Canada % % % Medicine estimated that 44,000 to 98,000 United States 23% 44% 30% Americans lose their lives in hospitals each source: Cathy Schoen et al. Health Affairs 2003/2005. year because of avoidable medical snafus. Smarter use of modern information tech- the quality nology is thought to be the most effective way In a 2003 report in the New England Journal to reduce medical errors. Yet America’s pri- of Medicine on a nationwide research project, mary-care physicians now lag behind their Elizabeth McGlynn and her RAND colleagues colleagues in Europe in use of electronic clin- reported that U.S. adults received on average ical information systems. It is no small irony only about 55 percent of the care generally that one notable exception is the U.S. Depart- recommended for their conditions. Earlier, ment of Veterans Affairs health care system, John Wennberg and his associates at Dart- the only model of purely mouth had published data showing that total left in the world outside of Cuba. Indeed, the Medicare spending per benefi ciary varied Institute of Medicine concluded that the VA across regions by a factor of close to three, was the national leader in the smart use of in- even after adjustments for differences in fees, formation technology and quality control. age, gender and severity of illness. By the same token, the pride Americans take in their easy access to high-tech medical

UWE REINHARDT is the James Madison professor of equipment and procedures is probably mis- political economy at . placed. As the Institute of Medicine puts it,

38 The Milken Institute Review “there is substantial evidence documenting health-insurance systems that operate within overuse of many services – services for which guidelines set by the federal government in the potential risk of harm outweighs the po- Ottawa. The federal rules encourage uniform- tential benefi ts.” ity through the mechanism of cost sharing, A glaring example of this tendency has just as the Medicaid system for the poor does been the precipitous use of autologous bone in the United States. It is why so many outsid- marrow transplantation, which had been used ers speak of “Canada’s national health sys- profl igately in the treatment of breast cancer. tem,” as if it were a single entity. More than 30,000 women suffered through The tax-fi nanced provincial insurance sys- that expensive, highly risky and painful pro- tems procure physician services, ser- cedure before careful studies showed it to be vices and sundry other health services from a ineffective. mixed for-profi t and not-for-profi t delivery system that is not drastically different from looking across the border the American delivery system – although it is With growing evidence that American health much more constrained by the market clout care promises more than it delivers, Ameri- characteristic of systems in which a single cans have begun to look elsewhere for lessons government payer does the negotiating on on how to fi nance and manage health care. In behalf of consumers. this inquiry, neighboring Canada is particu- For the comprehensive set of services cov- larly apt for a number of reasons. ered under the Health Canada Act, patients First, the training of physicians and nurses typically enjoy fi rst-dollar coverage. The pub- in Canada and the United States is similar, lic insurance systems cover about 70 percent greatly facilitating the movement of health of total health outlays, with the remainder care professionals between the two countries. paid through private insurance or out-of- Second, with the exception of Quebec, Cana- pocket. These latter services include dental dians and Americans share many cultural and vision care, long-term care and home traits that affect behavior toward the health care, and prescription drugs for the non-poor system – in particular, language and media. and non-elderly. Third, Canada has consistently spent only In June 2005, the Supreme Court of Cana- about half as much per person on health care da ruled that the prohibition of private insur- in real terms as the United States, yet often ance for medically necessary services to which ranks higher in measurable health outcomes. access is restricted by waiting time infringes Finally, opinion surveys suggest that Canadi- on citizens’ rights. That ruling has opened the ans are happier with their health care system door to the development of two-tier health than their counterparts south of the border. insurance and health care in Canada, a devel- One in three Americans say their system opment generating heated debate. should be “completely rebuilt,” compared with just one in seven Canadians. The Advantages of Single-Payer Systems Although much maligned by free-market a snapshot of devotees, single-payer (typically the govern- canada’s health system ment) health insurance systems do have a Canada’s health system actually consists of 13 number of advantages over market-oriented distinct provincial tax-fi nanced single-payer systems. First, by virtue of their administrative

Second Quarter 2007 39 rationing health care ministrative monstrosity, a truly bizarre mé- simplicity, single-payer systems are the ideal lange of thousands of payers with payment platforms for a uniform information infra- systems that differ for no socially benefi cial structure, based on common nomenclature reasons, as well as staggeringly complex pub- and technical processes. The single-payer sys- lic systems with mind-boggling administered tem of , for example, can track health prices and other rules expressing distinctions spending by provider and patient virtually as that can only be regarded as weird.” they happen. In the United States, the lag be- Third – and very important – a single- tween delivering service and recognizing its payer system is the ideal platform for an egal- expense can easily exceed one year. itarian distribution ethic in health care. Cana- Second, because the administrative struc- dians seem sincerely to believe that good ture of single-payer health insurance tends to health care is a right. And though Americans be simple, the administrative cost of operat- pay lip service to this ideal too, socioeconom- ing such systems tends to be low. Taiwan’s sys- ic status plays a major role in access to basic tem, for example, spends less than 2 percent human services. of outlays on administration – as, incidentally, Consider the legislators of my home state, does the U.S. single-payer Medicare program New Jersey, who apparently think nothing of for the elderly. By contrast, private insurers in limiting compensation to a pediatrician to the United States spend 15 to 25 percent on $30 for a Medicaid offi ce visit, while bestow- administration, marketing and profi ts. ing upon themselves insurance that pays that The McKinsey Global Institute found that same pediatrician $90 or more for treating in 1990 Americans used $390 less in real med- their children. ical resources per person than Germans did, Economists teach their students that pric- but spent $737 more on higher prices, $360 es signal value to suppliers. Not surprisingly, more on administration, and $256 more on large fractions of American physicians fully other forms of overhead. In their more recent understand that signal and refuse to treat study of administrative costs of the Canadian Medicaid patients altogether. Most Canadi- and U.S. health systems, Steffi e Woolhandler ans, who support a system that pays the same (Harvard), Terry Campbell (Canadian Insti- fee for the same service regardless of who is tute of Health) and David Himmelstein (Har- being treated, would probably consider these vard) estimated that in 1999 the U.S. system pricing practices ethically unacceptable. Nor, consumed $1,059 per person in administra- for that matter, would Canadians tolerate the tive costs, compared with just $307 in Canada. common practice among American hospitals The researchers also found that from 1969 to and pharmacies to charge more to uninsured 1999 the fraction of the total health care labor Americans lacking bargaining power – in most force accounted for by administrative work- instances, members of low-income families – ers grew 18 to 27 percent in the United States, than they charge private health insurers. but only from 16 to 19 percent in Canada. While one can quibble with these num- The Disadvantages of bers, there is no doubt that the virtues of Single-Payer Systems America’s health insurance system come at a As noted earlier, Canada spends only about stiff price. As the Brookings economist Henry half as much per person on health care as the Aaron put it, the U.S. health system is “an ad- United States, in spite of the fact that Canada

40 The Milken Institute Review is part of the high-cost North American mar- become the Achilles’ heel of a single-payer ket for health professionals and other health system and destroy the egalitarian social con- care inputs. The provincial plans achieve tract underlying a single-payer system. these low costs through three mechanisms. A number of Canadian commissions re- First, by virtue of their monopoly power as cently have examined the queues and suggest- buyers of health care, they can set prices just ed remedies. Last year, Canada’s Federal Wait high enough not to lose out too much to the Times Advisor and the Health Council of Can- neighboring United States market. Second, ada proposed evidence-based benchmarks for the provincial health plans use global caps on tolerable queues. Here it should be noted that hospital and physician outlays. Third, the experts do not consider some waiting time plans constrain physical capacity through per se as a sign of a health system’s shortcom-

mandated limits on the number of high-tech, ings if clinical evidence indicates that the high-cost facilities and procedures allowed to waits do not have untoward health effects. bill the system. Still, critics of the Canadian health system Each of these cost-containment mecha- have seized upon the queues as ammunition. nisms carries with it the danger of being ap- For example, Nadeem Esmail and Michael plied to excess. The global caps can trigger Walker of Canada’s free-market-oriented Fra- undesired incentives in the process of creat- ser Institute wrote last year in the Review that ing a zero-sum game for providers – for ex- “rationing services by imposing longer waits ample, making it fi nancially advantageous to is inherently ineffi cient. The very existence of prolong convalescent stays. The restrictions chronic delays in delivering services implies on physical capacity have created fairly long that the system is failing to use prices to queues for elective surgery, for a variety of di- equate supply and demand.” That proposition agnostic procedures, and for cardiac-care and invites critical comment. cancer-care procedures that Americans would consider urgent. If such queues grow too long styles of rationing health care

william rieser william – as they appear to have in Canada – they can The idea that a market approach to health

Second Quarter 2007 41 rationing health care than rationing by queue. Indeed, the word care can avoid rationing is a time-hallowed, “effi cient” cannot ever be meaningfully de- but in my view fallacious, cliché in the Amer- fi ned in abstraction of the goal that is to be ican debate on . The price system attained effi ciently. Why move effi ciently to- constitutes just one of many ways to ration ward a goal one does not wish to reach? scarce resources. As Michael Katz (Harvard) and Harvey Rosen (Princeton) write in their INFANT AND MATERNAL DEATH RATES, 2002

textbook Microeconomics: 10 “If bread were free, a huge quantity of it 8.9 U.S. would be demanded. Because the resources Canada used to produce bread are scarce, the actual 8 7.0 amount of bread has to be rationed among its potential users. Not everyone can have 6 5.4 all the bread that they could possibly want. LIVE BIRTHS 4.6

The bread must be rationed somehow; and 1,000 the price system accomplishes this in the 4 following way: Everyone who is willing to

pay the equilibrium price gets the good, and PER DEATHS 2 everyone who is not, does not.”

If readers substitute “health care” for 0 “bread” in this passage, they will have an idea MATERNAL INFANT about how a price system works in health care. SOURCE: OECD 2006 The effects of price rationing at its extreme can be inferred from Hidden Cost, Value Lost, As already suggested, few Canadians would a 2003 report from the Institute of Medicine. consider it ethically acceptable to pay a pedia- The panel estimated that some 18,000 Ameri- trician much less for treating a poor child cans die each year prematurely for want of than for treating a rich child. Similarly, one health insurance. can understand why so many Canadians look To be sure, most uninsured Americans askance at the establishment of an upper-tier eventually do receive needed care from their private health care system that can draw pro- neighborhood hospitals when they are criti- fessionals and other resources away from the cally ill. But there is solid research showing public system, merely to allow Canadians the price system rations uninsured Americans with superior ability to pay to jump the queue out of the timely, early-stage primary and sec- in health care. ondary care that might have avoided their se- Given this egalitarian ethos, Canadians rious or fatal illnesses. For example, far more would probably be aghast at the latest turn of uninsured children with asthma end up in the American health policy, as promoted by Pres- hospital in serious condition than insured ident Bush. The thrust of that policy is to children do. Yet roughly nine million Ameri- drive consumers into health insurance poli- can children are not covered. cies with very high deductibles and copay- It is not clear to me on what ethical or sci- ments. To that end, the president would allow entifi c basis one could judge this approach to Americans to make tax-deductible deposits rationing health care to be more “effi cient” into personal Health Savings Accounts to

42 The Milken Institute Review cover out-of-pocket costs and health insur- surance coverage would probably not occur ance premiums – but only if they purchase a to Canadians – or, for that matter, the citizens high-deductible insurance policy. of any other affl uent country. Perhaps it par- With a progressive income tax, this tax tially explains why so many more United preference is more valuable for high-income States babies and mothers die in birth than families than for middle-income families in the Canadian counterparts. That members of lower tax brackets. At the same time, it is ele- the Congress, who not long ago felt ethically mentary logic that an annual insurance de- compelled to rush back to Washington to sec- ductible of, say, $5,000 per family is likely to ond-guess the treatment of Terry Schiavo, so

There is solid research showing the price system rations uninsured Americans out of the timely, early-stage primary and secondary care that might have avoided their serious or fatal illnesses. induce a family with a moderate income to passively accept high levels of infant and ma- cut back more on discretionary health care ternal mortality must astound Canadians. than a high-income family. In effect, then, those who back the presi- what this all means dent’s approach are looking to moderate-in- I don’t view the Canadian health care system come groups to bear the brunt of price ra- as a model for the United States for at least tioning in health care and to shift more of the two reasons. First, the highly egalitarian pre- fi nancial burden of ill health from the healthy cepts inherent in the Canadian approach do to the chronically ill. not seem compatible with Americans’ prefer- To understand how this brave new world ence for letting money talk when it comes to would work, check out www.eHealthInsur- health care – or, for that matter, education or ance.com, an electronic market for individu- the administration of justice. Second, single- ally purchased (that is, nongroup) health in- payer government-run health systems are es- surance policies. Enter your family’s compo- pecially diffi cult to administer well in a polit- sition, ZIP code and the type of policy desired ical system so open to infl uence through cam- (Health Savings Account-qualifi ed or not), paign contributions. and you get a menu of customized offerings. By the same token, though, I don’t buy the Most of the policies listed are medically un- argument that government-run single-payer derwritten – that is, the premiums vary with health systems are inherently less effi cient the insured’s health status. Many of them than market-oriented health systems. In the have deductibles up to $10,000 per year for a end, each nation must decide which style of family, and most of them have sundry limita- rationing – by the queue or by price and ability tions and exclusions, the most common of to pay – is most compatible with its culture. which is maternity care. Mantras about the virtues of markets are no Excluding maternity care from health in- substitute for serious ethical conviction. M

Second Quarter 2007 43