Committee for Economic Development Comm 2000 L Street N.W., Suite 700 A StatementStatement bbyy tthehe Washington, D.C. 20036 RResearchesearch aandnd PPolicyolicy 202-296-5860 Main Number 202-223-0776 Fax CCommitteeommittee ooff tthehe 1-800-676-7353 CCommitteeommittee fforor EEconomicconomic DDevelopmentevelopment www.ced.org A Statement by the Research and Policy Committee of the Committee for Economic Development

i Quality, Aff ordable Health Care for All Moving Beyond the Employer-Based Health-Insurance System

Includes bibliographic references

ISBN #0-87186-187-9

First printing in bound-book form: 2007

Printed in the United States of America

COMMITTEE FOR ECONOMIC DEVELOPMENT

2000 L Street, N.W., Suite 700

Washington, D.C., 20036

202-296-5860

www.ced.org Contents

Purpose of Th is Statement ...... xi Executive Summary ...... 1 I. Introduction...... 9 Why Another CED Statement on Health Care?...... 9 Is the U.S. Health-Care System Failing? Performance Standards for a Nation’s Health-Care System . . 10 Does the American Health-Care System Meet Th ese Standards? ...... 11 Why Is Employer-Based Health Insurance Declining?...... 12 Th e Causes of High and Rising National Health Expenditures ...... 12 EBI Costs Cause Major Problems for Employers ...... 14 Employer Responses to Date Have Not Solved the Problem ...... 15 Buyers Cannot Hold Th eir Health Expenditure to Sustainable Growth Rates...... 16 Conclusion ...... 18 II. Why 35 Years of “Band-Aids” on a Fundamentally Flawed System Did Not Work...... 21 Why One Popular Idea – the Consumer-Directed Health Plan – Will Not Work...... 24 Consumer Direction ...... 24 High-Deductible Health Insurance...... 24 Why Canada’s “Single-Payer” System or “Medical Care for All” Will Not Solve Our Health-Care Problems...... 27 Many Other Current Favorite Ideas Are Being Oversold as Solutions in Th emselves; Others Would Not Work ...... 29 Conclusion ...... 31 III. What Might an Equitable, Effi cient, Universal Health-Care Financing and Delivery System Look Like?. . . 33 Goals...... 33 Sustainability...... 34 Incentives Alignment and Effi ciency ...... 34 Continuous Improvement and the Learning Organization ...... 35 Integration and Coordination of Care...... 35

iii Match Resources Used to the Needs of the Population Served ...... 36 Supply-Chain Management ...... 36 Market Reorganization to Streamline Administration and Customer Service ...... 36 Quality and Eff ectiveness ...... 37 Reorganize Around Medical Conditions, Not Medical Specialties...... 37 Reorganize for Chronic-Care Management ...... 37 Health Promotion and Disease Prevention ...... 38 Regional Centers for Complex Care ...... 38 End-of-Life Care...... 38 Core Competencies Th at Are Not Encouraged by the Traditional Model Are Urgently Needed ...... 38 Eff ectiveness ...... 38 Access to Quality Coverage...... 39 Conclusion ...... 40 IV. Essentials of Market-Based Universal Health Insurance with Consumer Choice of Health Plan ...... 41 Competitive Insurance Markets and Exchanges...... 42 Th e Need for a Market Organizer...... 42 What the Market Organizer Must Do...... 43 Universal Premium Credits ...... 46 Health-Care Financing and Delivery Systems Pursue Quality and Aff ordability ...... 47 Th e Cost of a Reformed Health-Insurance System ...... 48 Eff ects on the Health-Care Industry ...... 49 Care Providers ...... 49 Insurers ...... 49 Employers ...... 50 Labor Unions ...... 50 States and Localities ...... 50 Conclusion ...... 51 V. How Might We Get Th ere? A Path to Consumer-Choice-Driven Universal Health Insurance in Feasible Incremental Steps...... 53 Phase I: Building the Foundations for Responsible Choice ...... 53

iv Phase II: Progressively Expand Coverage ...... 58 Phase III: Achieve Market-Based Universal Health Insurance ...... 61 Conclusion ...... 62 Appendix A. CED’s 2002 Policy Statement – Has It Made a Diff erence for Health-Care Reform? ...... 65 Conclusion ...... 67 Appendix B. Th e Traditional Fee-for-Service-Indemnity Model of Health-Care Finance Is a Major Cause of Rising Costs ...... 69 How the Fee-for-Service Model Works ...... 69 Inappropriate Care and Variation in Practice Patterns ...... 71 FFS Is Inadequate for Treating Chronic Conditions ...... 73 Error, Fraud and Abuse ...... 73 Lack of Performance Tracking...... 73 Appendix C. Potential Alternative Delivery Systems ...... 75 Tiered High-Performance Networks (THPN) Combined with Capitated Primary Care Networks (CPCN)...... 76 Individual Practice Associations ...... 76 Prepaid Group Practices...... 77 Large Multi-Specialty Group Practices Evolving Toward PGP ...... 78 Roles of Academic Health Centers ...... 78 Appendix D. Management of Universal Health Insurance by the “Health Fed” ...... 79 Reconciling the Benefi t Package, the Prices of the Low-Priced Plans, and the Government Tax-Financed Fixed-Dollar Contributions...... 79 Managing Wide Regional Variations in Price-Adjusted and Disease-Adjusted per Capita Spending ...... 80 Managing the Problems Created by the Failure of Eligible Persons to Enroll in a Health Plan ...... 81 Appendix E. Functions of the Institute for Medical Outcomes and Technology Assessment (IMOTA)...... 83 Memoranda of Comment, Reservation or Dissent ...... 84 Glossary ...... 87 Endnotes...... 97

v CED Research and Policy Committee

Chairmen KATHLEEN COOPER CONO R. FUSCO Dean, College of Business Administration Managing Partner - Strategic Relationships PATRICK W. GROSS University of North Texas Grant Th ornton Chairman Th e Lovell Group W. BOWMAN CUTTER GERALD GREENWALD Managing Director Chairman WILLIAM W. LEWIS Warburg Pincus LLC Greenbriar Equity Group Director Emeritus McKinsey Global Institute KENNETH W. DAM BARBARA B. GROGAN McKinsey & Company, Inc. Max Pam Professor Emeritus of American Founder and Foreign Law and Senior Lecturer, Western Industrial Contractors University of Chicago Law School RICHARD W. HANSELMAN Members Th e University of Chicago Former Chairman IAN ARNOF RONALD R. DAVENPORT Health Net Inc. Chairman Chairman of the Board Arnof Family Foundation Sheridan Broadcasting Corporation RODERICK M. HILLS Chairman ALAN BELZER RICHARD H. DAVIS Hills Stern & Morley LLP President & Chief Operating Offi cer Partner (Retired) Davis Manafort, Inc. EDWARD A. KANGAS Allied Signal Chairman & Chief Executive Offi cer, RICHARD J. DAVIS Retired LEE C. BOLLINGER Senior Partner Deloitte & Touche President Weil, Gotshal & Manges LLP Columbia University JOSEPH E. KASPUTYS WILLIAM DONALDSON Chairman, President & Chief Executive ROY J. BOSTOCK Chairman Offi cer Chairman Donaldson Enterprises Global Insight, Inc. Sealedge Investments, LLC FRANK P. DOYLE CHARLES E.M. KOLB JOHN BRADEMAS Executive Vice President (Retired) President President Emeritus General Electric Company Committee for Economic Development New York University W. D. EBERLE BRUCE K. MACLAURY BETH BROOKE Chairman President Emeritus Global Vice Chair, Strategy, Manchester Associates, Ltd. Th e Brookings Institution Communications and Regulatory Aff airs Ernst & Young LLP ALLEN FAGIN WILLIAM J. MCDONOUGH Chairman Vice Chairman and Special Advisor to the DONALD R. CALDWELL Proskauer Rose LLP Chairman Chairman & Chief Executive Offi cer Merrill Lynch & Co., Inc. Cross Atlantic Capital Partners MATTHEW FINK President (Retired) LENNY MENDONCA DAVID A. CAPUTO Investment Company Institute Chairman President Emeritus McKinsey Global Institute Pace University EDMUND B. FITZGERALD McKinsey & Company, Inc. Managing Director GERHARD CASPER Woodmont Associates ALFRED T. MOCKETT President Emeritus Chairman & CEO Stanford University HARRY FREEMAN Motive, Inc. Chairman MICHAEL CHESSER Th e Mark Twain Institute NICHOLAS G. MOORE Chairman, President & CEO Senior Counsel and Director Great Plains Energy Services PATRICK FORD Bechtel Group, Inc. President & CEO, U.S. CAROLYN CHIN Burson-Marsteller DONNA S. MOREA Chairman & Chief Executive Offi cer President, U.S. Operations and India Cebiz CGI vi CED Research and Policy Committee

M. MICHEL ORBAN JAMES Q. RIORDAN SARAH G. SMITH Partner Chairman Chief Accounting Offi cer RRE Ventures Quentin Partners Co. Goldman Sachs Group Inc.

STEFFEN E. PALKO DANIEL ROSE MATTHEW J. STOVER Vice Chairman & President (Retired) Chairman Chairman XTO Energy Inc. Rose Associates, Inc. LKM Ventures, LLC

CAROL J. PARRY LANDON H. ROWLAND VAUGHN O. VENNERBERG President Chairman Senior Vice President and Chief of Staff Corporate Social Responsibility EverGlades Financial XTO Energy Inc. Associates GEORGE E. RUPP JOSH S. WESTON PETER G. PETERSON President Honorary Chairman Senior Chairman International Rescue Committee Automatic Data Processing, Inc. Th e Blackstone Group JOHN C. SICILIANO JOHN P. WHITE NED REGAN Partner Lecturer in Public Policy University Professor Grail Partners LLC Harvard University Th e City University of New York

vii CED Subcommittee on Health Care

Co-Chairs David R. Nachbar Ruth Liu Robert B. Chess Senior Vice President, Human Resources Senior Health Policy Consultant Bausch & Lomb Inc. Kaiser Permanente Chairman Nektar Therapeutics Doug Price Paul Meyer Jerome H. Grossman Founder Senior Director, Public Policy Educare Colorado Pfizer Inc. Senior Fellow and Director of the Harvard/ Kennedy School Health Care Delivery Landon H. Rowland Gaylon Morris Project Chairman Senior Director, Public Policy Harvard University Everglades Financial Wyeth

Ian Spatz Susan Regan Vice President, Public Policy Consultant Trustees Merck & Co., Inc. Visiting Nurse Service of New York Rob Dugger Managing Director Harold Williams Jack Rodgers Tudor Investment Corporation President Emeritus Managing Director Getty Trust PricewaterhouseCoopers LLP Trevor Fetter President and CEO Josh Weston Sally S. Welborn Tenet Healthcare Corporation Honorary Chairman Vice President, Corporate Benefits Automatic Data Processing, Inc. Wells Fargo & Co. Patrick W. Gross Chairman Kurt E. Yeager Stefanos Zenios The Lovell Group Former President and Chief Executive Professor, Graduate School of Business Officer Stanford University Roderick M. Hills Electric Power Research Institute Chairman Hills Stern & Morley LLP Steven Zatkin Senior Vice President, Government Relations Project Director Charlene Drew Jarvis Kaiser Foundation Health Plan, Inc. Alain C. Enthoven President Southeastern University Marriner S. Eccles Professor of Public & Private Management, Emeritus Charles E.M. Kolb Guests Stanford University President Amee Chande Committee for Economic Development Vice President, New Business Development William W. Lewis Wal-Mart CED Staff Director Emeritus Victor Fuchs Joseph Minarik McKinsey Global Institute Senior VP and Director of Research McKinsey & Company, Inc. Professor of Economics & Health Research & Policy, Emeritus Committee for Economic Development John C. Loomis Stanford University Vice President, Human Resources Alan Garber General Electric Company Founding Director, Center for Health Policy Lenny Mendonca & Center for Primary Care and Chairman Outcomes Research McKinsey Global Institute Stanford University McKinsey & Company, Inc.

viii ix Responsibility for CED Statements on National Policy

Th e Committee for Economic Development is an proposals; its purpose is to urge careful consideration independent research and policy organization of over of the objectives set forth in this statement and of the 200 business leaders and educators. CED is non-profi t, best means of accomplishing those objectives. non-partisan, and non-political. Its purpose is to pro- Each statement is preceded by extensive discussions, pose policies that bring about steady economic growth meetings, and exchange of memoranda. Th e research at high employment and reasonably stable prices, is undertaken by a subcommittee, assisted by advisors increased productivity and living standards, greater chosen for their competence in the fi eld under study. and more equal opportunity for every citizen, and an improved quality of life for all. Th e full Research and Policy Committee participates in the drafting of recommendations. Likewise, the All CED policy recommendations must have the ap- trustees on the drafting subcommittee vote to approve proval of trustees on the Research and Policy Com- or disapprove a policy statement, and they share with mittee. Th is committee is directed under the bylaws, the Research and Policy Committee the privilege of which emphasize that “all research is to be thoroughly submitting individual comments for publication. objective in character, and the approach in each in- stance is to be from the standpoint of the general Th e recommendations presented herein are those of the welfare and not from that of any special political or trustee members of the Research and Policy Committee economic group.” Th e committee is aided by a Re- and the responsible subcommittee. Th ey are not necessarily search Advisory Board of leading social scientists and endorsed by other trustees or by non-trustee subcommittee by a small permanent professional staff . members, advisors, contributors, staff members, or others associated with CED. Th e Research and Policy Committee does not attempt to pass judgment on any pending specifi c legislative

x Purpose of This Statement

Health care is perhaps the major public policy ques- patients side-by-side, sustainable reform must em- tion mark hanging over this nation’s future, in terms of brace the entire system. And the core of that system is both our prosperity and the quality of our lives. employer-based health insurance. Th e United States spends signifi cantly more of its Th e largest segment of our population – persons of gross domestic product on health care than any other working age and their dependents – customarily has developed nation, but our quality of health – as mea- obtained its health-insurance coverage through em- sured by improvements in longevity, the prevalence of ployment. Yet that part of our health-care system is chronic disease, or infant mortality, for example – is failing. It is fully as defi cient as the government-run mediocre at best. Some of this result undoubtedly and fi nanced sector – just as fi nancially unsustain- comes from “life-style” choices, but some clearly comes able and ineffi cient, if not more so. Private budgets from the nature of our health-care system. Lives are are just as threatened as public budgets, businesses are shortened and people suff er because our health dollars hard-pressed to maintain their health-insurance com- do not buy the care that we need. mitments to their employees and remain competitive, and the health of those privately insured is not what Furthermore, the growing cost of health care threatens it should be, given the power of this nation, and the the budgets of households, businesses, and govern- amount we pay. Th e lack of secure care for those with- ments at all levels. Health insurance is beyond the fi - out insurance is a threat to their health and fi nances, nancial reach of many American families, leaving them and in the long run, to those of the entire population. unprotected and often wanting for necessary care. Businesses strain to continue paying the insurance pre- CED recognized the crucial role of the employer-based miums for the coverage that their workers have come health-insurance system in our 2002 policy statement, to expect. Important public issues are crowded out of A New Vision for Health Care: A Leadership Role for government fi scal plans by the costs of health care for Business. In it, we presented our recommendations for the elderly and the needy. If those costs continue to private employers to restructure their employees’ insur- grow at current trends, they will soon consume all of ance for greater quality and sustainable cost. However, the revenues now devoted to our national, state and we have seen little progress toward the implementa- local priorities. tion of the recommendations of that statement, while quality, aff ordability and access to insurance have Th e health-care crisis looms so large that it is natural continued to deteriorate. Accordingly, we undertook to wonder which part of the problem to tackle fi rst. a new project to review the issue, and determine what For some years, the Washington policy community is needed for our working-aged population and their has focused its greatest concern on the cost of Medi- dependents to achieve aff ordable health care – as a fi rst care and Medicaid, linked as those programs are to the step toward quality and sustainability for the entire aging of the baby-boom generation. Budget analysts health-care system. have noted, as has CED, that the confl uence of the rising costs in those programs alone will make the cur- Our fundamental problem is two-fold. We as individ- rent federal budget structure unsustainable. However, uals can demand more and more health-care services CED has long believed, and the consensus of opin- without directly feeling their extra costs; and the dy- ion now appears to agree, that policy cannot achieve namics of the health-care industry do not work to close enduring reform of the public health-care programs the enormous gap between the most effi cient providers taken by themselves. Because our health-care system is of health care and the ineffi cient ones, as occurs natu- an interdependent whole that treats public and private rally in the rest of our economy. Th is new CED policy

xi statement fi nds that employers acting alone or even Acknowledgements in voluntary consortium cannot achieve the kind of systematic change to fi x this problem and for which we Th e dedicated and knowledgeable business, academic had hoped in our previous policy statement. Instead, it and policy leaders listed on pages viii and ix served recommends a new approach that marries market forc- on the Subcommittee, and developed and crafted this es with appropriate government structures and incen- policy statement. We thank them for their contribu- tives to drive improvements in coverage, quality, and tions of expertise, judgment and commitment. value. Th e statement explains that such public-policy We wish to extend our special thanks to Alain C. action is needed to head off the ongoing deterioration Enthoven, Marriner S. Eccles Professor of Public and of quality, aff ordability and access that threaten both Private Management, Emeritus, of the Stanford Uni- the health and prosperity of our entire society now and versity Graduate School of Business, for his extraordi- for decades to come. nary service as director of this project. We also want CED does not support either a government-run to express appreciation for the outstanding, dedicated command-and-control system, or a so-called consum- commitment of this Subcommittee’s co-chairs. Jerome er-directed system under which individuals would H. Grossman, M.D., Senior Fellow and Director of take at least implicit responsibility for choosing their the Harvard/Kennedy School Health Care Deliv- own therapies and treatments. Instead, the statement ery Project, is a distinguished, nationally recognized recommends market-based consumer choice among expert on health-care policy and a practicing physi- competing insurance and care-delivery plans that meet cian who brings decades of expertise to this important quality and coverage standards. A key recommenda- CED project. He is equally at home advising the Insti- tion is that this consumer choice must be responsible tute of Medicine or taking the pulse of a patient. His – that is, the consumer, informed by mandatory and fellow co-chair, Robert B. Chess, Chairman of Nektar standardized reporting of quality and performance Th erapeutics, has an extensive background in manage- by insurers, must be able to save money by choosing a ment and public policy development, and a thorough less-expensive plan. Another key recommendation is knowledge of a key sector of the health-care industry. the establishment of an independent regulatory agency, Together, the co-chairs provided leadership that was fashioned after the Federal Reserve and the Securities vital for the Subcommittee to fi nd its way to consensus and Exchange Commission, to report on the state of on this enormously complex issue. Joseph J. Minarik, the health-care sector in terms of infl ation and aff ord- Senior Vice President and Director of Research of ability, and ensure the effi ciency and fairness of the CED, advised the Subcommittee. Matthew Schurin insurance market. In the system’s ultimate form, after and Julie Kalishman, CED Research Associates, pro- an ambitious but measured phase-in process, every vided diligent and eff ective assistance in the production consumer would receive a premium credit that would of the statement. purchase the low-priced plan that met rigorous qual- Patrick W. Gross, Co-Chair ity standards. CED believes that such a reform of our Research and Policy Committee health-care fi n a n c i n g system would lead insurers and Chairman providers, through market competition, to restruc- Th e Lovell Group ture fundamentally the health-care delivery system, improving both quality and aff ordability. Th us both William W. Lewis, Co-Chair universal coverage and fi nancial sustainability would Research and Policy Committee be achieved. Director Emeritus McKinsey Global Institute We hope that these fi ndings will stimulate a construc- McKinsey & Company, Inc. tive, nonpartisan debate of this truly crucial public- policy issue.

xii Executive Summary

Th e U.S. employer-based health-insurance system is it, and whose provisions, like coinsurance and deduct- failing. Fewer American workers have insurance now ibles, do not deter people from obtaining care that is than did seven years ago; and fewer American fi rms are important for their health. It also means having geo- off ering health insurance now than did then. Many graphic and transportation access to a facility and to people do without care because they are not covered, professionals who will provide appropriate care. or fear – with justifi cation – that one illness or the For all of our country’s wealth and power, our health- loss of a job will cost them their coverage. Th e com- care system demonstrably fails to meet these basic petitiveness of American fi rms is threatened by the criteria. On cost, the price of an average family insur- cost of health insurance. Public budgets at every level ance policy – $11,500 per year for a family of four in of government are eroded by the costs of health care, 2006 – is almost 20 percent of the earning power of including costs that previously were paid by employ- the median household, and the cost is growing about ers. Th ough the United States is the wealthiest nation 2.5 percentage points per year faster than GDP. Th us, in the world and arguably has the best care for per- health insurance is pricing itself out of reach. On qual- sons with dire health needs who do have coverage, our ity, authoritative studies document numerous errors of overall health status is mediocre at best. We believe prescription and treatment, and inappropriate and un- that our health-insurance system is in crisis, and needs necessary surgery and hospitalization, that cause un- immediate attention to stop steady erosion that may necessary suff ering, illness, injury and cost. Th ere are become sharp, quantum deterioration. wide variations in medical practices from one commu- Is the U.S. Health-Care System Failing? Perfor- nity to another, and even among doctors in the same mance Standards for a Nation’s Health-Care Sys- community. Moreover, a 2003 study by RAND found tem. Th e standards by which to judge the overall that consumers are receiving only about 55 percent of performance of a health-care system are cost, quality, the care called for under generally accepted standards and access. “Cost” is the usual shorthand term for the of medical practice. But perhaps most seriously, on amount a society spends on health care. Do health in- access, 47.0 million Americans were without health surance and health care remain within reach for fami- insurance in 2006, up from 38.7 million in 2000. lies of moderate means? Can health-insurance premi- Employer-Based Health Insurance Is in Decline. ums fi t within the total compensation that is aff ordable Most insured Americans get their coverage through by the employers of most or all people? employment, either theirs or a family member’s. But “Quality” has many meanings. Are Americans likely the number and percentage of Americans covered by to receive recommended care – that is, those interven- employer-based health insurance (EBI) is declining. tions that are well supported by clinical evidence and From 2000 to 2006, the absolute number of people are known to benefi t patients? How likely are patients covered by EBI fell from 179.4 million to 177.2 million; with serious chronic conditions to get the care they and the covered percentage of the population under age need? How likely are they to get appropriate care – 65 fell from 68.3 percent to 62.9 percent. From 2000 that is, care of the kind and in just the amount that to 2007, the percentage of fi rms off ering health bene- confers maximum benefi t, but no more? fi ts fell from 69 percent to 60 percent, refl ecting mainly small employers dropping EBI. Th ere are underlying “Access” is shorthand for people’s ability to obtain ap- forces, especially the rapidly increasing cost of health propriate care, including having health insurance that insurance and small employers locked out by pre-exist- makes care reasonably aff ordable to people who need ing conditions, that make this trend likely to continue.

1 Why Is Th is Happening? Th e entire health-care fi - effi ciencies. However, such integrated systems would, nancing system rests on infl ationary foundations. Th e in eff ect, dictate the choice of providers to employees. incentives and the organization of health care work Employees would not want such an absence of choice, against aff ordable care. especially if they had no sense that they would share in the fi nancial savings. Th e causes are several. However, the heart of the prob- lem is that the vast majority of employers off er their Compounding these structural problems, there has employees no choice; they off er either no insurance at been a large increase in the prevalence of chronic dis- all, or one plan. For fi rms that off er coverage, having ease and our ability to treat it – and the cost of doing just one plan is administratively simpler. Insurers also so. Twenty medical conditions accounted for 67 per- prefer to cover all of a fi rm’s employees, because that cent of the per capita growth in private health-insur- minimizes per-worker administrative cost and obviates ance costs between 1987 and 2002. Th e health-care the risk of enrolling only the sickest employees. Be- system is not oriented to early detection and treatment cause employees, understandably, want to choose their or to chronic disease management, but rather to a visit own doctors, employers tend to off er one insurance to the doctor and the collection of a fee for a service to plan that off ers access to as many doctors as possible; treat symptoms when they arise. and the only way to reimburse doctors under such wide Also, largely because of the fee-for-service method of access is fee-for-service payment. payment to doctors in which millions of individual acts Th erefore, the vast majority of employees have no must be billed and paid for, improper billing because opportunity or incentive to choose a cost-eff ective of fraud, carelessness, or error is a huge problem. Th e high-quality health plan, and health-care insurers and Offi ce of the Inspector General of the Department of providers have no inducement to provide the quality, Health and Human Services estimated that in 1996, aff ordable care that consumers want. Employers, not the Medicare Program made about $23.2 billion in im- patients and consumers, make the decisions that shape proper payments. As the Inspector General’s Report the U.S. health-care system, from fi nancing to delivery said: “Th e Medicare program is inherently vulnerable of care. And multiplied over tens of thousands of em- to incorrect provider billing practices.” Th e same could ployers, those decisions dictate a dominant system of be said of all insurance under fee-for-service medicine. fee-for service medicine for the entire population. EBI Costs Cause Employers Major Problems. Em- Fee-for-service medicine presents the worst incen- ployers, the primary purchasers of health insurance, tives: the more services, the more fees. Patients want must deal with the insurance market as it exists; they all the services that might deliver any benefi t, however cannot themselves change the structure of the entire small; doctors and hospitals are predisposed to provide system. EBI costs give employers a powerful incentive those services, at least in part because they are paid to try to avoid this growing burden – which employers for each service they provide. Providers actually make do, in part, by tightening restrictions on who is eligible more money when they are slow to diagnose and treat for EBI, and by increasing required employee contri- a problem: they are paid for more “services” that way. butions so that low-paid workers do not choose to pay Th ere is little or no incentive to utilize cost-saving tech- their share and participate. Or, employers can simply nological advances such as health information tech- close the plant or offi ce and obtain the services from nology and electronic patient records. Indeed, in this lower-cost labor overseas, or from low-cost employers “cost-unconscious” environment, there is little incentive in this country who do not provide health insurance. to fi nd a less-costly way to solve any health problem. Th ese policies may mitigate employer problems, but On the contrary, costly new discoveries, though often they cause serious human problems, and they do not highly benefi cial, can be deployed at great expense and help forestall the decline in EBI. considerable risk even before they are fully evaluated. Employer Responses to Date Have Not Solved the Alternative health plans might off er lower cost by Problem. Because merely shifting costs to employees choosing providers who wish to practice in integrated is a clearly visible dead end, fi rms also have experi- networks, taking advantage of technology and other mented with wellness programs, preventive care, and

2 management of chronic conditions, backed up with it is claimed, total health-care costs would be brought fi nancial incentives. Firms have tried bargaining with under control. Th ough CDHPs are better than providers, using health records to promote “evidence- no coverage at all, they are not a complete solution. based medicine” to choose the best treatments, and Health expenditures are very concentrated on relative- creating “high-performance networks” of physicians ly few people. In any given year, well over 80 percent of with strong records of cost-effi cient care. However, health expenditure dollars will be spent on people who none of these eff orts would change in any fundamental have exceeded their deductibles or can safely expect to way the practice of medicine, or the arguably cost-inef- do so, for any level of deductibles that is reasonable. fi cient adoption of new and ever-more-expensive health Many people with chronic conditions can expect to technologies. reach their deductibles, as can anyone who has been an inpatient in a hospital, or is likely to enter a hospital. In sum, the entire U.S. health-care system is built on Once CDHP enrollees have reached their deductibles, infl ationary foundations – worse still, with limited in- they will in eff ect be in cost-unconscious fee-for-service centives to keep people healthy. medicine. CDHPs will be advantageous to those who are both healthy and wealthy, because they can both Proposed Solutions – Past and Present – aff ord the higher deductibles and take the most advan- Do Not Work tage of the health savings account tax shelter (which “Band-Aids.” For at least 35 years, there has been a benefi ts most those in the highest tax-rate brackets, but slowly building realization that our health-care system is worth next to nothing to the worst-off taxpayers who is not sustainable. Public policymakers and private ac- face a very low or even zero-percent tax rate). Th e loser tors have tried to respond, yielding a discouraging his- may be the fairness of our private health-care fi nancing tory of espousing and adopting simplistic and partial system – not to mention the viability of health insur- “solutions” ranging from utilization reviews, or attacks ance for those who are not fortunate enough to benefi t on “waste, fraud and abuse,” to “managed care” – veri- from CDHPs. table “Band-Aids” on top of a fundamentally fl awed Single Payer, or “Medicare for All.” Another “big system. Some of these contained germs of good ideas, idea” for health-system reform is a “single-payer” and some could be part of a rational comprehensive system, like Canada’s. Probably at the federal level, solution; but none came close to addressing our funda- government would serve as the single health insurer, mental problems. Likewise, new ideas such as health cover everybody, and pay all the bills according to information technology and digital health records a government-determined or negotiated fee sched- would help, but would not solve the fundamental, sys- ule. Another name could be “Medicare for all;” every temic weakness in health-care delivery. American would be covered by the Medicare program Consumer-Directed Health Plans (CDHPs). or something very similar. In the United States today, CDHPs are claimed to be something close to a com- this model has features with great appeal, like univer- plete answer for the problems of the nation’s health- sal coverage and one billing system. However, the U.S. care system. CDHPs are insurance plans with high single-payer system, Medicare, is locked into uncoor- deductibles, which the consumer must pay before in- dinated, fragmented fee-for-service medicine; it has surance coverage begins. Consumers may have health proven practically impossible for Medicare to break savings accounts (HSAs), funded either by themselves out, with the law allowing patient access to any willing or by their employers, to pay for care under the deduct- physician. Medicare fee-for-service has built-in incen- ible. Because of the high deductible, the premium can tives for delivering volume, not quality. It motivates, or be lower. Also because of the high deductible, consum- is compatible with, a great deal of over-use, under-use, ers would be expected to engage in preventive care; and and misuse of services. Studies show that Medicare then, when illness or injury strikes, to use the latest in- patients in the last six months of life in Florida get formation technology to fi nd the most economical and several times as many doctor visits as similar patients effi cient therapies and treatments, to minimize their in Minnesota, while reporting less satisfaction with out-of-pocket spending under the CDHP deductible, their care. Th us, a single-payer system might provide and to protect the balance in their HSAs. In this way, universal coverage for a time, but costs would surely

3 continue spiraling out of control – as they are in Medi- providers to align incentives is a necessary condition care today – threatening everyone’s coverage. for an effi cient delivery system. Once the incentives truly are aligned, we can expect improvements along What Might an Equitable, Effi cient, the following fronts. Universal Health-Care Financing and Health-care providers who need to satisfy cost-con- Delivery System Look Like? scious consumers must organize their systems for Th e heart of the solution for health care is competi- chronic-care management. As of September 2004, 133 tion to serve cost-conscious buyers, and incentives for million people, almost half of all Americans, live with providers to create and run high-quality, but aff ord- a chronic condition. Almost half of these people have able, health-care systems. Competition motivates in- multiple chronic conditions. In 2001, the care given to novation and effi ciency improvement. For virtually the people with chronic conditions accounted for 83 per- entire non-health-care economy over the history of the cent of health-care spending. Today’s health-care and nation, competitive pressures have increased quality payment systems are designed to manage and pay for and tempered prices. Th e improvements could not be acute episodes, not chronic conditions. Fee-for-service predicted in advance. Consumer choices signaled price generally pays for episodes such as doctor visits or pro- standards and preferred product and service attributes cedures, not for on-going preventive and chronic care to the marketplace, and suppliers improved their pro- such as counseling sessions. cesses and methods to meet and then to surpass those Chronic disease often arises from the failure to engage standards, thereby setting new ones. Even given the in good health behaviors – such as obesity-prevention, unique nature of health care, competition provides the exercise, diabetes-control, smoking-cessation, and pre- best hope for aff ordable, quality health care. vention methods such as cancer screening. Resources Our goal should be adaptive delivery systems that could be saved in the long run by systems that empha- move toward the attributes of the modern fi rm in size primary care, disease prevention and early detec- virtually every other industry: from unaccountable tion and treatment. Fee-for-service generates unusual to accountable; from uncoordinated to coordinated; income opportunities for doctors in specialties such as from wasteful and infl ationary to effi cient (seeking oncology and radiology, and poor pay for primary care maximum value for money for patients), with incen- – leading progressively fewer graduates of American tives for value-enhancing innovation; from provider- medical schools to seek careers in primary care. Th e centric to patient-centric; a system focused on keeping other stages of the continuum of health-care delivery, people well, at work, and out of the hospital; in short, a procedures, catastrophic care, and end-of-life care, also system committed to improving health outcomes and could be improved in quality and cost in the same way reducing health system expenditures, bringing expen- – through system coordination across teams and error diture growth into line with income growth. Delivery avoidance. systems that approximate most of these attributes do Although the share of health spending on patients exist. True competition among insurers and providers in their last year of life has often been exaggerated, it will encourage the entire industry to improve in all of remains signifi cant: it is about 30 percent of Medicare, these dimensions. and Medicare is about 17 percent of national health Also, to correct the problems created because many expenditures. Th ere is substantial regional variation. people lack health insurance, everyone should have in- Th e high-spending regions spend 60 percent more per formed, responsible (that is, cost-conscious) choices of patient and provide more services than the low-spend- health insurance programs that are fi nancially sustain- ing regions, but Medicare enrollees in higher-spending able. To have effi cient delivery systems, there must be regions do not experience better health outcomes or a market for them – that is, a demand for effi ciency. satisfaction with care. Providers in a cost-conscious Today, there is virtually no demand for effi ciency. If system will need to develop more-humane alternatives all or most people had a reason to choose effi cient for end-of-life care that are less specialist- and ICU- systems, care providers would fi nd it necessary to cre- intensive than the acute inpatient setting. ate and off er them. Th us, engaging both patients and

4 Th e huge fl ow of medical information (over 10,000 markets for health insurance and health-care delivery randomized trials are published each year) is beyond are unique. Competition is possible, but the nature of the grasp of solo or small group practitioners. A suc- these markets does mean that the competitive process cessful system must translate this information into needs rules – much as do the markets for other insur- up-to-date science-based best-practice guidelines and ance products or for securities, for example – to be conveniently integrate them into actual care delivery. effi cient and fair. To provide those rules, we propose a Health information technology can include caregiver health-insurance “exchange,” which would improve on support tools – such as shared comprehensive electron- the current Federal Employees Health Benefi ts Plan ic health records, guidelines, prompts, and reminders (FEHBP) – the system that also covers members of – to monitor performance and take corrective actions. Congress. Every individual would be guaranteed the Care should be delivered in the least-costly appropri- right to choose one from a range of private insurance ate settings, considering total system costs, not just plans. Every plan would be required to meet the com- costs and revenues associated with one setting – with prehensive standards set by the exchange; only qual- smooth transitions and hand-off s between care set- ity plans with broad coverage may compete. Health tings, so that, for example, outpatient providers are insurers and providers would be free to use alternative well-informed on inpatient care (and vice versa). delivery system models. Although this restructuring would radically change It would be essential that wide-access PPO plans be America’s health-care delivery system, each of these available, so that everyone who wanted to continue with expectations is nonetheless reasonable on its face – no such coverage and with his or her own physician could more than what one would reasonably expect from a do so; every consumer could “keep what he (or she) well-run world-class competitive company that adapts has.” Plans could charge no diff erence in premium to technology and market challenges and opportunities for age or preexisting conditions (unlike the current in any other sector of the economy. individual insurance market). Th ese exchanges would set standards for plans to ensure quality, comprehen- Essentials of Market-Based Universal sive coverage, and consumer protection through stan- Health Insurance with Consumer Choice of dardized “fi ne print.” Each exchange would provide Health Plan side-by-side plan comparisons, and would organize an annual open season at which individuals could change We propose a system of market-based universal health plans – introducing competition into the marketplace insurance – which eliminates the current system’s for health insurance and care. Each exchange would distortions by giving each consumer a choice of dif- “risk-adjust” premium revenue to insurers – that is, ferent plans and a fi xed-dollar credit to purchase the pay more to insurers that cover relatively more people plan of his or her choice. With this system, consumers with expensive conditions. Risk adjustment is already have an incentive to be cost-conscious. We believe that undertaken by insurers in some private systems that competition among private insurance plans, to attract resemble what we propose and has just been adopted informed, cost- and quality-conscious consumers, is for the private Medicare insurers. the only way to achieve sustainable, aff ordable, quality health care for all Americans. By reforming the fi n a n c - Th e exchanges would be supervised by a “Health Fed,” ing system for health coverage, we can create the incen- modeled on the independence and structure of the Fed- tives that will drive insurers and providers to reform eral Reserve, which would be established at the outset the health delivery system. to guide and facilitate the creation of the exchanges. Th e Health Fed would be funded independently (as Th e nation can achieve such a market for quality, af- is the Federal Reserve), by a small surcharge on insur- fordable health care through two key steps: ance premiums; its independent funding is essential, to In the fi rst step, the federal government should es- ensure that it is insulated from politics, and that it can tablish independent regional “exchanges” that would react quickly to market challenges and opportunities provide a single point of entry for each individual to and to technological change. Th e Health Fed would choose among competing private health plans. Th e collect initial data to evaluate proposed insurance plans and to establish and improve risk adjustment. It would

5 set standards for performance disclosure by plans and costs beyond the fi xed-dollar contribution. Consum- providers. Th e Health Fed would create an Institute ers could change plans freely at annual open seasons for Medical Outcomes and Technology Assessment to if they were dissatisfi ed. Th erefore, to attract and evaluate the comparative costs and benefi ts of technol- to keep customers, plans would need to be adaptive ogies and care practices, and report to health providers to pursue effi ciency and quality, which would create and the public. Th ere would be an option of national meaningful competition in the health-care market- (not just state) regulation of health insurance plans place, driven by fair rules to reward quality and cost- to facilitate competition and innovation. In sum, the eff ectiveness, rather than denying care and selecting exchange system would perform a role very similar to, risks. Rules-based competition has driven progress in but we believe improving upon, that now performed by every other industry in our economy and around the the Offi ce of Personnel Management for the Federal world, and competition shows the greatest promise Employees Health Benefi ts Plan. of turning health care from its current path of unsus- tainable cost growth, mediocre quality, deteriorating Second, subject to progress of the exchanges and the health, and declining coverage. willingness of the public to provide the fi nancing, every household would receive a fi xed-dollar credit suffi cient With health plans competing to attract cost-conscious to purchase the low-priced quality health plan off ered consumers, we can expect our health-care system to in its region. Every individual, therefore, would be change for the better. Health providers would be ac- able to buy quality health insurance at no out-of-pocket countable for quality and cost. To remain aff ordable cost, and coverage would be universal. As an alterna- while maintaining quality for their customers, pro- tive to the low-price plan, an individual or household viders would move away from fee-for-service episodic could choose to purchase a more-expensive plan by treatment to emphasizing primary care, health pro- paying the additional cost above the low-priced plan, motion, disease prevention, early detection and treat- using after-tax dollars. Such fi xed-dollar contributions ment, chronic disease management, and cost-reducing have been used with success in the employer context innovation and process improvement – which would by Hewlett Packard, Wells Fargo, the University of include effi cient use of technology, such as electronic California, and Stanford University, and the states of medical records, knowledge management, and comput- Washington, Wisconsin, and California. Th e fi xed- erized caregiver support tools; better use of physicians’ dollar credit would be fi nanced by eliminating the time, in part through team practice with non-M.D. current exclusion for employer-provided insurance, and professionals; matching resources to the needs of the by broadly based tax revenues – for example a payroll, populations served; and regional concentration of com- value-added or environmental tax. In eff ect, every plex care, to achieve expertise and economies of scale. individual in the nation would contribute toward the To control costs, providers would need to avoid con- health-insurance program, and every individual would fl icts of interest, and use the best possible evaluation of be entitled to insurance – without costly “mandates” or the effi cacy of treatments and therapies. means-testing. Th is design would focus competition on value for With every individual assured access to a quality in- money in the informed best judgment of consumers, surance plan, and able to pocket the full savings from and not in any way pick winners and losers in advance. choosing a low-priced plan, insurers would for the fi rst Th e competitive market would do that, over time. Th e time have an incentive to organize with health provid- system should encourage diff ering delivery modes to ers to off er quality, aff ordable care that people – not foster competition and innovation. In the end, some their employers – want. Together, the health-insurance existing models might be winners in the competitive exchange and the fi xed-dollar contributions to indi- marketplace, or the winners might be entirely new, as- viduals would lead naturally to a competitive market- yet-unimagined models. One thing would be certain: place among health-care providers and insurance plans. the outcome would be better than what has gone be- Every consumer would have insurance and an incentive fore because the incentives and opportunities for con- to choose the plan that provides what he or she be- sumers to make economizing choices, and the need for lieves to be the best combination of quality and value insurers and providers to seek improvement to satisfy for money, because he or she would be responsible for consumers, would be enormously increased.

6 Th e Cost of a Reformed Health-Insurance Sys- In fact, many segments of the health-care sector would tem. Universal coverage would increase the number of benefi t from reform. Physicians and other providers people seeking services, but cost-conscious consumers of health care would be better off having more people would gradually migrate toward less-expensive plans; covered as users (and reliable payers) for their prod- and all plans would seek effi ciencies to reduce their ucts and services. At the same time, of course, those premiums. CED plans further research, including a fi rms and individuals would face greater competition, full actuarial assessment of our recommendation in de- and more scrutiny of the effi cacy of treatments and tail. However, basically similar legislation proposed by procedures. But in sum, the outlook for stable growth Senators Ron Wyden (D-OR) and Robert F. Bennett would be much improved under a system of sustain- (R-UT) (which does diff er in some signifi cant details) able and universal coverage. Th ose individuals and is estimated to reduce total national health-care spend- fi rms willing to compete should welcome such reform. ing by a small percentage in the fi rst year, rising to 7.7 Other sectors of the economy – insurers, employers, percent in the tenth year. Th e savings would be the net and state and local governments – would be aff ected of costs for additional services for the newly insured, in varying ways, but in the end benefi ted by a sound more than off set by savings from the incentives of price health-care system. competition for consumers and insurers, and addition- al savings in administration. In other words, under a How Might We Get There? A Path to system of responsible, cost-conscious consumer choice, Consumer-Choice-Driven Universal Health the issue is not how much the nation spends on health Insurance in Feasible Incremental Steps care, but who pays a smaller total; if the nation can use the resources that are now devoted to health care – by Our political process much prefers incremental move- employers, households, and governments – then it can ment to sudden, large, discontinuous changes whose aff ord coverage for all, with money left over, and the consequences cannot be foreseen. Still, the problems savings would grow over time. However, mobilizing of cost, quality and access have become so serious that all of the resources now used for health care would be a the needed changes to our health-care fi nancing and non-trivial task. We believe that a fi nancing solution is delivery system are fundamental and far-reaching. attainable, and we plan further research. Such restructuring through a political process that val- ues stability would require bold but feasible incremen- Eff ects on the Health-Care Industry. Th e health- tal steps that could produce steady progress, and in the care industry is now about one-sixth of the U.S. end get us to Market-Based Universal Health Insur- economy. Any marked change in the structure of that ance. We recommend a three-step process. industry would have correspondingly large impacts. In the broadest sense, improvements in the effi ciency Phase I: Building the Foundations for Responsible of delivering health care, like those for any other good Choice. To create an administrative structure, mod- or service, would make the economy and the nation ernize and adapt the FEHBP into a framework for a as a whole better off . Process improvement in health- national system of health-insurance exchanges. Use care delivery likely would reduce (or reduce the rate of fi xed-dollar contributions to encourage responsible growth of) the 16 percent of the GDP that is now de- choice; introduce risk adjustment; establish a mini- voted to health care. However, every dollar of that 16 mum benefi t standard for all plans; and allow premi- percent of the GDP is income to those who work in the ums to vary by region. To ease market entry in many industry today. If that share declines, some people’s in- locations across the country, to make the system more comes will decline, and some people may lose their jobs competitive and less costly, and to eliminate confl icts altogether. Society should be sensitive to these eff ects, between state and federal health-insurance regula- but concern about those dislocations should not pre- tion, modernize and simplify health insurance regu- vent progress for all. Th e deteriorating current system lation by creating an alternative federal regulatory has left growing millions of people without insurance system that participating multi-state health plans can coverage, to the detriment of their health and of the choose instead of being regulated by states. To per- health-care system. Inaction would merely extend that form such regulation, build a new independent agency deterioration. – a “Health Fed” – patterned on the Federal Reserve

7 Board and the Securities Exchange Commission. To Conclusion provide authoritative scientifi c information about the value and costs of clinical interventions, create a Th e program outlined here has the greatest prospect of national institute for medical outcomes and technology achieving the three goals of restraining health-care ex- assessment. And to reverse the recent growth in the penditures, achieving universal insurance coverage, and number of the uninsured, expand existing safety-net improving quality. It relies on incentives for individu- programs, especially the State Children’s Health Insur- als to choose both plans and providers that off er what ance Program (SCHIP), pending the availability of those individuals judge to be the best combination true universal coverage. of quality and price. In response, insurers and care providers will have the strongest incentive to increase Phase II: Progressively Expand the Availability of quality and restrain prices, creating a new dynamic Coverage. To begin transforming the employment- toward improvement. Th ose consumers who prefer based insurance system into a wide range of respon- today’s model of care would be able to keep it, if they sible choices of carrier and delivery system, include were willing to pay any diff erence in price. However, all small employers (up to 50 or 100 employees) in a by current indications, most people would be happy to new exchange system, building on the FEHBP. Small consider new, evolving, and improving delivery modes employers need the most help to provide coverage to that emphasize maintaining health through preventive their workers, and will benefi t from participation in care and healthy behavior, early intervention against the exchange. To maintain a large, sound risk pool, and sustained control of chronic diseases, and use of require that those small fi rms purchase their insurance contemporary digital technology and communications. through the exchange to keep the tax exclusion for employer premiums. Include the self-employed, and Merely extending coverage – even to universal cover- even entire states that choose to opt in. Progressively age – under the current system would not solve the expand the ceiling for the new system until all employ- core problem, because with the cost of coverage grow- ers are included. To create cost-consciousness, and to ing faster than the economy’s capacity to pay it, no save billions of tax dollars to help low-income people coverage is secure. Command-and-control systems buy insurance, cap the tax exclusion for employer have a poor track record in modern economies; and health benefi ts at the level of an effi cient health plan medical care is too complex to devolve all authority to in each region. Further, to maintain cost-conscious- the individual patient. Market-based universal health ness, prohibit employers from selectively subsidizing insurance, with individuals choosing the health plans the purchase of more-expensive health plans by their and delivery systems that they deem best, shows great employees. Employers must give any such subsidy promise – much greater than any alternative. to all of their employees, not only those who choose more-expensive insurance; and employers must al- low their employees to take the subsidy in cash, rather than insurance premiums, if they so choose. Finally, expand the functions of the “Health Fed” to include setting standards for performance disclosure and risk adjustment. Phase III: Achieve Market-Based Universal Health Insurance. To complete the transition to universal health insurance, replace all employer contributions with universal fi xed-dollar contributions paid for with broad-based tax revenues. To help fi nance this, elimi- nate any tax break for employer-paid health insurance.

8 Chapter One: Introduction

Th e U.S. employer-based health-insurance system is in the problem, and business needs to be a part of the failing. Fewer American workers have insurance, and solution. fewer American employers are off ering health insur- ance, than did seven years ago. Many people forgo care Furthermore, CED believes that business off ers unique because they are not covered. Many fear – with justi- insight to fi nd the solution. Government fi at cannot fi cation – that one illness or the loss of a job will cost for long maintain aff ordable, quality health coverage. them their coverage. Th e competitiveness of Ameri- To summarize, we believe that the continuation of the can fi rms is threatened by the cost of health insurance. dominant uncoordinated, small-practice fee-for-service Government budgets at every level are strained by the model of health-care delivery, largely sheltered from costs of health care, including costs that had been paid competition and therefore lacking innovation in organi- by employers. Th e failing employer-based insurance zation and process, has increased cost without improv- system is dragging down the entire health-care delivery ing access or most dimensions of quality. We believe system. Th ough the United States is the wealthiest na- that competition among private insurance plans, to tion in the world, with what may well be the best care attract informed, cost- and quality-conscious consum- for persons with dire health needs who do have cover- ers, is the only way to achieve sustainable, aff ordable, age, our overall health status is mediocre at best. quality health care for all Americans. By reforming the fi n a n c i n g system for health coverage, we can create the CED believes that our entire health-care fi nance and incentives that will drive insurers and providers to re- delivery system is in crisis, and in need of immedi- form the health delivery system. In sum, CED believes ate attention – to stop steady erosion that may soon that the competition by which business lives every day, become a sharp deterioration. As employers, we are carefully channeled to reward only the delivery of qual- concerned for the health and fi nancial well-being of ity care at aff ordable prices, holds the best promise of our employees; but our concerns reach much further. meeting the health-care needs of every American. Th e lack of care and the costs suff ered by those Ameri- cans without insurance are a national blight. Th e com- Th is introduction will explain why the current health- pounded expense of emergency care for their neglected care system is plagued with high and rising costs and illnesses is a burden on those with insurance coverage. mediocre quality. Th e second chapter will show why Furthermore, the growing cost of care for those with purported remedies, past and present, have not worked coverage is a threat to the health care of all Americans. and will not work. Th e third chapter will outline the improvements in care that would be possible with a CED believes that business must play an important market-driven system. Th e fourth chapter will de- role in the future of health care. Since World War scribe such an incentive-oriented system, and the fi nal II, more by accident than design, business has accu- chapter will lay out a road map to get there. mulated most of the responsibility for, and much of the expertise on, the fi nancing and the structure of Why Another CED Statement on Health the health-care system for the working-aged popula- Care? tion and their dependents. Th e subsequent deteriora- tion of the health-care system has handicapped busi- Five years ago, the Committee for Economic Develop- ness in international competition and in meeting the ment issued a policy statement entitled A New Vision needs of its employees. Business has been entrapped for Health Care: A Leadership Role for Business.a Th at

a A detailed summary of that statement and an evaluation of subsequent developments are included in Appendix A.

9 statement presented major recommendations for large that an affl uent society, as it grows still more affl u- businesses, and for businesses in conjunction with ent, would choose to devote some (or even much) of government. Th e statement decried “…the closely en- its extra income toward its health.3 But beyond the tangled problems of escalating costs, uneven and poor question of whether growing expenditures buy im- quality, and inadequate access,” and stated that the proved care, or rather are merely a rear-guard action “recommendations…, taken together, would address against the ill eff ects of unhealthy lifestyles, we must these problems and improve the system’s effi ciency and care about aff ordability. Do health insurance and equity… Th is report is a call to action. We challenge health care remain within reach for families of moder- our own members, the business community at large, ate means? Can health-insurance premiums fi t within public policymakers, and other sectors of society to aff ordable total compensation of employees? Finally, is join us in taking the diffi cult steps necessary to create the trajectory of health expenditures sustainable – that an effi cient system that will provide access to high- is, growing no faster than the GDP, or not much faster quality health care for all Americans.”1 than aff ordable total compensation of employees? In these terms, cost as a percentage of the GDP measures Although we continue to believe that the recommen- a share of people’s earning power. dations in that statement are sound, we see no signs of employer action. Th e number of Americans with Th ose costs that do not impose on family budgets are employer-sponsored health insurance, and the number paid by government. More than 60 percent of na- of employers who off er health coverage, have continued tional health expenditures (NHE) now passes through to decline.b Meanwhile, the retirement of the baby- public-sector budgets (including the tax exclusions for boom generation, with its demography-driven pres- employer-paid health benefi ts, and insurance costs for sure on the nation’s health-care system, has drawn ever public employees) and is therefore a drain on govern- closer. A national poll has found that sixty percent of ment fi nances, leading to higher defi cits or taxes, and Americans believe that the federal government should crowding out other vital public services.4 If health guarantee health insurance to every American, and are insurance is not aff ordable to people with low incomes, willing to pay higher taxes and forgo future tax cuts to is there room in public-sector budgets for subsidies to achieve universal coverage.2 help those people purchase health insurance? Th e nation’s health-care problems are becoming criti- “Quality” has many meanings. Americans like to cal. Rising health costs strain both public and pri- think that we have the highest quality health care in vate budgets, and make many American businesses the world. Th at may be true in the sense of the most less competitive. Care needed by rich and poor alike advanced medical technologies for well-insured people. is wanting. We conclude that even more-aggressive But other concepts of quality have gained attention public-policy action is needed. Th e remainder of this lately. How likely are Americans to receive recom- chapter will explain why. mended care – that is, those interventions that are well-supported by clinical evidence and are known to Is the U.S. Health-Care System Failing? benefi t patients? How likely are patients with serious Performance Standards for a Nation’s chronic conditions to get the care they need? How Health-Care System likely are they to get appropriate care – that is, care of the kind and in just the amount that confers maximum What are reasonable standards for the overall perfor- benefi t, but no more? Inappropriate care is the medi- mance of a health-care system? Th e usual answer in cal term for what is often called “unnecessary care.” health-policy circles is “cost, quality and access.” How many people are in the hospital unnecessarily, “Cost” is the shorthand term for health-care expendi- or for a condition that could have been prevented by tures – that is, the amount a society spends on health less-costly and less-invasive outpatient care? How care, measured either per capita or as a percentage of many operations do people have that are not the best the gross domestic product (GDP). It makes sense for their health? Is American medical care safe? How

b A more detailed evaluation of the evidence is included later in this statement.

10 often is the wrong limb amputated? How likely are Does the American Health-Care System Meet Americans to die or suff er from hospital infections or These Standards? errors in hospitals or in medications? And fi nally, is For all of this nation’s wealth and power, our health- quality improving as a consequence of better-organized care system demonstrably fails to meet these basic care, or is it suff ering from increasing fragmentation of criteria. care delivery? On the question of cost, NHE have been growing “Access” is shorthand for people’s ability to obtain ap- about 2.5 percentage points per year faster than GDP propriate care, and it has a fi nancial component and a over the past 25 years. NHE in 2006 were about 16.5 delivery-system component. Th e fi nancial component percent of the GDP.6 If these rates continue, NHE generally refers to health insurance that makes care will reach about 28 percent of GDP by 2030. Th e reasonably aff ordable to people who need it, and whose price of an average family insurance policy, $11,500 provisions, like coinsurance and deductibles, do not per year for a family of four in 2006, can be weighed deter people from obtaining care that is important for against typical family earning power.7 Th e median their health. Th e delivery-system component refers to family income in the United States in 2006 was less having geographic and transportation access to a facil- than $60,000.8 Th us, a family health-insurance pre- ity and to professionals who will provide appropriate mium in 2006 – not including other out-of-pocket care, which can be a special problem in rural areas. health-care costs – is almost 20 percent of the earning Financial access is usually evaluated in terms of the power of the median family. And in 2004, the govern- number of people who do not have health insurance – ment share of health-care cost was about one-third of which is arguably the most important single criterion the total of federal, state, and local budgets.c Once the of success. It is in everyone’s interest that everyone has baby-boom generation begins to retire, public health- health insurance. Th e uninsured go without needed care costs (especially for Medicare) will grow even care. What care they receive is often in emergency faster. Th us, if health outlays are not unbearable to- rooms, which is very costly and lacking the continu- day, they soon will be. Both public and private health- ity of care needed by the growing number of people insurance purchasers have been unable to constrain with chronic conditions. Some uninsured adults with their shares of NHE to sustainable growth rates. chronic conditions who forgo proper care become When it comes to quality, the Institute of Medicine disabled and end up on public programs. Th e lack of (IOM) of the National Academy of Sciences reported health insurance causes fi nancial hardship, loss of sav- that between 44,000 and 98,000 Americans die annu- ings, and in the extreme, medical bankruptcies.5 Hos- ally in hospitals from medical errors.9 A recent IOM pitals bear fi nancial burdens because they are required report estimated that at least 1.5 million Americans by law to treat uninsured persons in urgent need of are sickened, injured, or killed each year by errors in care. Th is burden is shifted to those who do have prescribing, dispensing, and taking medications.10 health insurance, thereby raising the cost of insurance. Drug errors cause at least 400,000 preventable injuries Determining eligibility for public programs, including and deaths in hospitals each year, more than 800,000 credit and collection expense, leads to large admin- in nursing homes and facilities for the elderly, and istrative costs. Finally, doctors and hospitals provide 530,000 among Medicare recipients treated in outpa- charity, or free, or “uncompensated” care, and they tient clinics. A 2003 RAND study found that only argue that they must be protected from competition about 55 percent of the care called for under generally because they are disadvantaged by this burden of un- accepted standards of medical practice was actually be- insured patients. Without this burden, which would ing delivered.11 Adopting technologies to improve this be lifted by universal coverage, unleashed competitive situation has been very slow.12 RAND studies also market forces could drive greater effi ciency without the have documented considerable overuse of care. Dart- unintended side eff ect of further denying care to unin- mouth studies have shown wide geographic variations sured people. c Government health outlays (and the revenue cost of tax exclusions) at all levels were about 10 percent of GDP. In 2004, all government receipts at the federal, state and local levels were about 30 percent of GDP.

11 in medical decisions such as the frequency of hospital- EBI fell by 2.8 percentage points between 1987 and izations and surgery per capita.d Th us, strong evidence 1999.17 Another survey showed a decline from 1999 indicates that some people are getting too much (that to 2004 of 3.5 percentage points.18 Linking the two is, unnecessary or unhelpful) care, and others too series implies a decline of about 6.3 percentage points little.13 from 1987 to 2004. Data from the Bureau of Labor Statistics suggest a greater decline for full-time work- Still, the failure of our health-care system in terms ers in the private sector – a decrease in coverage of 15 of access may be the most serious. According to an percentage points from 1989-90 to 2003.19 From 2000 August 2007 Census Bureau report, 47.0 million to 2006, the absolute number of people covered by Americans lacked health insurance in 2006, up from EBI fell from 179.4 million to 177.2 million. And the 38.7 million in 2000.14 Th e uninsured have worse covered percentage of the population under age 65, the health outcomes than similar people with insurance.15 percentage of workers in all fi rms and their dependents Th is situation is clearly contrary to our nation’s values. who were covered by EBI, fell from 68.3 percent to People should not suff er and die for lack of ability to 62.9 percent.20 From 2000 to 2007, the percentage of pay.e fi r m s o ff ering health benefi ts fell from 69 percent to 60 America has numerous patchwork public programs percent, refl ecting mainly small employers dropping to compensate for the lack of universal insurance EBI.21 Th e rapidly increasing cost of health insurance coverage.f It would be simpler – and a lot cheaper makes this trend likely to continue. Falling EBI – to make sure everybody had at least fi nancial ac- coverage shifts the costs of the health-care system onto cess to appropriate care. As just one indication of the those employers that do provide insurance, and onto potential savings from broader coverage with sound government. primary care, the New York Times recently reported Health-insurance premiums are rising faster than that a Texas hospital found that it could actually save the aff ordable increases in total compensation, and money by providing free preventive outpatient care to therefore, faster than incomes. Premiums in 2007 are diabetics, instead of more expensive emergency hospi- estimated to be almost double those of 2000.22 Health talization which the hospital was obligated to provide insurance is pricing itself out of reach. Of course, the without reimbursement.16 real problem is not the insurance policies themselves Is universal coverage a utopian, socialistic dream, or but the underlying cost of health-care services. is it a practical, economically and morally compelling goal for our society? Most other advanced democra- The Causes of High and Rising National Health cies have achieved it, and we could do so too – with a Expenditures system built on our own history and consistent with Rapid health expenditure growth is widespread. our own values. Th ough other advanced industrialized nations have lower levels of health-care spending as shares of their Why Is Employer-Based Health Insurance GDPs, their expenditures are rising over the long term Declining? at faster rates than their GDPs (though somewhat slower than in the United States).23 So health expen- Most insured Americans get their health coverage diture increases are a global phenomenon. Within the through employment, either theirs or a family mem- United States, government health programs such as ber’s. But the number and percentage of Americans Medicare and the Federal Employees Health Benefi ts covered by employer-based health insurance (EBI) are Program (FEHBP) are aff ected as much as employer- declining. Th e Employee Benefi ts Research Institute based insurance. (EBRI) found that the percent of all workers with d Th ese studies adjust for diff erences in the characteristics of the diff erent populations. e Nor should others refuse to buy insurance they could aff ord and then impose their health costs on other people, either by presenting themselves for free care, or by trying to sign up for insurance after they already are ill. f Th ese programs include the Emergency Medical Treatment and Active Labor Act (EMTALA), the law requiring hospitals to care for uninsured people; disproportionate share payments by the federal government to hospitals in areas that have above-average proportions of the uninsured; Med- icaid; the State Children’s Health Insurance Program; Ryan White for AIDS; Maternal and Child Health; and so on.

12 Th e following causes of rapid health-cost growth inter- Second, expenditures are increased by the extensive act with each other. deployment of new medical technologies that benefit people’s lives, in some cases greatly. People want them, First, there is cost-unconscious demand. In the United their doctors want to provide them, and society does States, we have created a system in which most people not want to deny them. Consumption of these tech- – patients and providers alike – have little direct per- nologies has been increasing, often at double-digit sonal interest in making the most cost-effi cient health- rates.25 Examples include joint replacements and care choices, and often little opportunity to do so. invasive cardiology procedures. Th ere are costly new Health care-delivery in the United States is dominated biologics that correct inherited enzyme defi ciencies. by fragmented, uncoordinated, small-practice fee-for- Cerezyme, a biologic to treat Gaucher’s disease, now service medicine (FFS), under which patients have a costs some $200,000 to $600,000 per patient per year wide choice of doctors, and insurers pay piece-by-piece depending on weight-related dosage.26 New drugs for for every service the patient receives. Th is system is some blood-clotting disorders can exceed $1 million fi lled with cost-increasing incentives, and rewards and per year, and some cancer drugs are also very costly. encourages such ineffi ciencies as wasteful duplication Cost-unconscious demand encourages the development of tests. It is poorly organized for overall economy and and deployment of many costly new technologies. Pro- safety, systematic improvement, or even performance viders are often rewarded with prestige, patients and measurement. It lacks incentives for cost-saving inno- revenue for using them. Conversely, under FFS, there vations such as health information technology, which is little demand for expenditure-reducing technologies. often are not in the economic interest of individual Technology developers know that patients and their providers.24 FFS leaves insured patients cost-uncon- doctors will not weigh costs and benefi ts. Indeed, the scious, because they are not responsible for the cost Medicare program is prohibited by law from consider- of any extra service. FFS even reduces the incomes of ing costs in coverage decisions. Doctors are essentially providers who innovate to reduce the need for services. reimbursed for cost, and so save nothing for themselves Indeed, providing patients with more services, even if or their patients by rejecting new and more expensive they have little or no medical value, results directly in technologies. Many of the new technologies have been greater incomes for providers.g Unfortunately, FFS evaluated and improve health outcomes. Others go also sets the standard for economic performance in the into widespread use without thorough evaluation and non-FFS sector. For example, Medicare payments to may not be more benefi cial than existing, less-costly health-maintenance organizations (HMOs) are tied to technologies, or may even be harmful on balance.27 FFS costs in the same geographic areas, and so prepaid group practices have been able to raise their prices in American culture values advanced medical technol- step with FFS-based insurance.h ogy and has great faith in it – witness, for example, the optimism surrounding the emerging fi elds of stem cell Cost-unconsciousness is exacerbated by tax policy, in research and genetic medicine. A culture with such particular the exclusion of employer contributions for enthusiasm can regard cost reduction as unworthy. employee health care and insurance, without limit, One young physician reported: “In training, we were from the taxable incomes of employees. Depending taught that if you really care about cost, you are not a on the tax rates of the diff erent states, this tax break good doctor.” Who wants to be, or to go to, the “low- means that an extra $100 in health benefi ts may cost priced doctor?” many employees only $60 to $70 in after-tax income, or in extreme cases as little as about $50.i Th is factor Th ird, there has been a large increase in the prevalence too biases choices in favor of more-costly health care. of chronic disease and our ability (and expenditures) to treat it. Among adults aged 20 to 74 over the last

g A detailed analysis of the failings of the fee-for-service system is presented in Appendix B. h Th ough Medicare HMO pricing is now on a risk-adjusted basis. i Th ese hypothetical computations take into account the federal income tax (with rates as high as 35 percent), the federal payroll tax (with a rate of 15.3 percent for the self-employed), and state income taxes.

13 20 years, obesity has doubled; and diabetes, which is And fourth, most health-care delivery is local, and clinically linked to obesity, has increased by about half. there are local insurer, hospital or system monopolies. Twenty medical conditions have accounted for 67 per- Anti-trust policy at the local level is weak and unfo- cent of the growth in per-capita health insurance costs cused or does not exist at all. over the same period.28 Th is problem is exacerbated by EBI Costs Cause Major Problems for Employers. a health-care system that is not oriented to early detec- Employers have a powerful incentive to avoid grow- tion or to chronic disease management, but rather to ing EBI costs, while continuing to pay attractive cash the treatment of symptoms when they arise. wages. Th ey do so by tightening restrictions on who is Th e prevalence of chronic conditions and the cost of eligible for EBI, and by increasing required employee their treatment are of fundamental importance to the contributions so that low-paid workers do not choose structure and focus of the health-care fi nancing and to pay their share and participate. Th us, only about 79 delivery system. Th e Johns Hopkins University center percent of employees in fi rms off ering EBI are actually called Partnership for Solutions studies the prevalence eligible for coverage, and only about 82 percent of those and cost of chronic conditions and fi nds that 133 mil- eligible actually participate.31 Th ese policies may miti- lion Americans in 2005 had a chronic condition.29,j gate employer problems, but they cause serious human Th e number is growing faster than the population problems, and they do not help forestall the decline in in general, because the population is aging, and also EBI. because medical advances have transformed formerly Rising EBI costs confront employers with unpleasant deadly diseases into costly chronic conditions, as in the choices. When general infl ation is high, employers can case of HIV/AIDS.k mask increased EBI costs with wage increases less than Th e most prevalent chronic conditions are hyper- the infl ation rate. But when infl ation is low, as it is now, tension, arthritis, respiratory diseases, cholesterol employers must reduce either benefi ts, for example by disorders, chronic mental conditions, heart disease, raising deductibles and shifting costs to employees, eye disorders, asthma and diabetes, some cancers, or cash pay – either of which (particularly the latter) congestive heart failure, and end-stage renal disease. evokes employee dissatisfaction. Or, employers can In 2001, care given to people with chronic conditions simply close the plant or offi ce and obtain the services accounted for 83 percent of total health-care spend- from lower-cost labor overseas. Or, they can selectively ing, and 62 percent of all health-care spending was on outsource services overseas, or to low-cost employers in behalf of people with two or more chronic conditions.l this country who do not provide health insurance. As the Johns Hopkins report concludes, “…the care Employers are constrained by the insurance that is provided in the current acute, episodic model is not available; they must deal with the market as it exists. In cost-eff ective and often leads to poor outcomes for today’s health insurance market, there is little demand patients with chronic conditions.” Th is problem led for economical care. One or a small group of employers the IOM to recommend “[c]are based on continuous cannot create competition and will not achieve the healing relationships,” which is particularly diffi cult to competitive health-care delivery system that would achieve when workers so frequently change jobs, and result if all employers acted together. Th e great diver- as a result, change or even lose health insurance and sity of interests, circumstances and views about health health caregivers.30 insurance among employers, however, has precluded

j Th ey defi ne chronic conditions as those that “last a year or longer and limit what one can do and/or require ongoing medical care.” k Th e anti-retroviral therapy for HIV/AIDS costs roughly $18,000 per year in the United States. l Th is does not necessarily mean that that much of the care was for chronic conditions – only that it was for people having chronic conditions.

14 collective action to create a market open to competition medicine, or the pursuit and arguably cost-ineffi cient from effi cient delivery systems.32,m adoption of new and ever-more-expensive health-care technologies. Many employers use health insurance as a tool in the labor market to compete for employees, and off er or One approach toward changing insurance and health maintain more generous benefi ts which make employ- care more fundamentally, Consumer-Directed Health ees even more cost-unconscious. A sustainable market Plans (CDHPs) (sometimes called High-Deductible system requires cost-conscious consumers. Health Plans (HDHPs)), involves some valuable ele- ments, such as greater transparency in quality and Employer Responses to Date Have Not Solved the prices, and greater consumer responsibility.n However, Problem. Employers have tried to control their costs CDHPs are not, over the long run, a complete answer and to innovate in the delivery of insurance and health to the cost problem. care generally to their employees. Th e incentive to innovate can be strong, because individual U.S. fi rms Some fi rms off er CDHPs as aff ordable insurance can become less competitive relative to each other, for their lower-wage workers. Th e CDHP premium and producers of tradable goods and services can lose can be lower because the cost of care below the high market share to foreign fi rms. Because merely shifting deductible is paid by the employee if and when care costs to employees is a clearly visible dead end, fi rms of is needed. In the short run, CDHPs are one way for suffi cient size have experimented with wellness pro- hard-pressed fi rms to shift the burden of EBI to grams, preventive care, and management of employees’ employees, or “rebalance the compensation portfolio.” chronic conditions, backed up with fi nancial incen- However, in the long run, such shifting will not miti- tives, and with on-site exercise and basic-care facili- gate the problem of expenditures growing faster than ties. Firms have tried bargaining with providers; using aff ordable total compensation, because health-care health records to promote “evidence-based medicine” to expenditures are very concentrated on few people – the choose the best treatments; and creating “high-perfor- most-costly 10 percent use 70 percent of the resources mance networks” of physicians with strong records of – so most spending will be on people who already have cost-effi cient care.33 On the other side of the transac- exceeded their deductibles, or can reasonably expect tion, retailers have created quick-access low-cost health to do so. To those persons, the marginal cost of more facilities, and cut-priced strategies for dozens of basic care will be at or near zero.34 prescription drugs. Th e high-deductible approach has other problems. All of these approaches are helpful. However, it is Many people do not have much money in the bank, not clear that any one, or even a carefully selected if they even have bank accounts. Th ey may lack the combination among them, would do more than achieve funds to pay the deductible expenses, and so have admittedly welcome one-time savings – because none an incentive to forgo necessary care, leading to more would change in any fundamental way the practice of costly future medical needs. Some HDHPs attempt m In theory, large employers could try to go into the health-care management business and organize their own delivery systems, as did Kaiser Indus- tries. But today, that would be very diffi cult. Th e building of the Kaiser system was long and diffi cult, at a time when health care was much cheaper than it is today. Only the largest employers, or very cohesive coalitions, could consider such a process. Generally, employer work forces in any one geographic area are small compared to the size (several hundred thousand members) that effi cient delivery systems need to achieve economies of scale. Few, if any, employers have enough employees in any given area to support one integrated delivery system, much less the two or three that would be needed to create competition. Since Henry Kaiser, few employers have attempted this, and usually with poor results. Organizing effi cient health- care delivery is complex, and not part of the core competence of most employers. Alternatively, several employers could try to collaborate to create an effi cient health-care system of suffi cient size. Th e Minnesota Buyers’ Health Care Action Group (BHCAG), originally formed in 1991 by 14 large, self-insured employers in the Twin Cities, is a rare example. In 1997, BHCAG off ered employees of participating employers a broad choice of “care systems” built around groups of primary-care physicians and affi liated specialists and hospitals. Each “care system” set its own price for covering an employee of standard risk, and its own provider fees. Th is was the best private- sector implementation of the principles of rational economic incentives. Its enrollment reached about 150,000 employees and dependents. With changes of key personnel and of company ownership through acquisitions, it proved diffi cult to sustain employer commitment, and attempts to ex- port this model to other cities were not successful. Some of the success in the Twin Cities could be ascribed to special features of that market, such as the presence of multi-specialty group practices and national fi rms’ headquarters. n Th ese valuable elements are included in other ideas as well, including CED’s own 2002 statement. We will discuss CDHP and HDHP in greater detail in the next chapter.

15 to mitigate this by exempting preventive care ser- Buyers Cannot Hold Th eir Health Expenditure to vices from the deductible. Th e long-run success of Sustainable Growth Rates. Th e biggest problem with this strategy is uncertain. Another tool to pay for EBI is that employers, acting individually, collectively, large deductibles is the health savings account (HSA). or in concert with government, in more than 50 years However, persons with low incomes, facing low or zero of trying, have been unable to conceive and execute any marginal tax rates, have correspondingly low incentives strategy to achieve sustainable expenditure growth. and limited means to contribute to the accounts, and Employers have been unable to create market com- the employers of low-wage workers may not contribute. petition so that more-effi cient delivery systems can In an alternative approach, some large employers have compete and take market share from the dominant off ered employees a wide range of health-care delivery fragmented, uncoordinated FFS small-practice model. systems with responsible choices. Th at is, employees Remarkably, alternative delivery systems cannot market save by choosing less-costly plans and are responsible superior effi ciency through lower premiums; there is for the additional cost of more-expensive plans.o practically no market in which effi cient systems com- However, such employers are usually not large enough pete to serve premium-price-sensitive consumers. in any area to change the whole delivery system. And As one example of this market failure, a highly many employers that do off er choices also contribute regarded RAND study found that Group Health some high percentage (often 80 or 100 percent) of the Cooperative of Puget Sound, a leading prepaid group premium of any plan of the employee’s choice. Th ough practice, delivered high-quality care for 28 percent apparently generous, these contributions subsidize fewer resources than did the local FFS sector.35 Ye t , the ineffi cient systems and bias choices toward more neither Group Health nor similar providers have costly plans. Many of these employers are constrained been very successful in that market. Group Health by collective bargaining agreements and union Cooperative could not use its effi ciency advantage demands that the employer pay the whole premium, as to expand market share, and therefore force other illustrated by the Detroit car companies. Ironically, it providers to improve their effi ciency. Instead, employer is not unheard of for employees who are confused by policies forced Group Health to become more like the alternative complex insurance agreements, and who ineffi cient providers. Employers preferred a network of will pay little or nothing whichever they choose, to FFS solo-practice doctors to provide “full replacement” pick the most expensive, on the assumption that the coverage – that is, one plan serving a whole employ- costliest must be the best. ment group. In this way, employer policies actually To illustrate the eff ect on the insurance market, destroyed value by forcing an effi cient delivery system consider a health plan that is competing in a group to revert to a less-effi cient delivery model. where the employer pays 80 percent of the premium. It is most unusual to see a “market” in which producers Th e health plan management asks: “Should we make off ering more value for money cannot translate this the eff ort to cut costs and premiums by $1.00 to attract advantage into a large and growing market share. Upon more customers?” Th e answer is: “Probably not; the refl ection, however, it should be clear why greater customers considering choosing us will get to keep only effi ciency has not been rewarded in the health-care 20 cents before taxes, and maybe only 12 to 14 cents marketplace. after taxes. It would be better to spend the dollar on other things that would attract customers more.” Th us, To create a market in which the effi cient providers there is a strong incentive to increase, not decrease, can drive the others to achieve greater effi ciency, the costs. Markets cannot discipline prices when consum- great majority of employers would have to off er their ers will pay any price (a condition that economists call employees responsible choices of delivery systems and “price-inelastic demand”). affi liated health-insurance plans, such that employees who chose lower-priced, more-effi cient plans could

o We discuss this important incentive in more detail in our own proposal in chapter four.

16 keep the resulting savings. Fixed-dollar employer provider’s performance, and so there is no monitoring contributions would allow effi cient insurance plans to and no incentive for quality improvement. FFS pays pass their effi ciencies on to customers through lower for the volume of services, not for quality, not for actu- premiums. Employers should off er plans that select ally curing the patient promptly. It actually pays more providers based on quality and effi ciency, as well as to providers – hospitals as well as physicians – who plans that include virtually all physicians. cause complications or are slow to make a diagnosis, because they provide more “services” along the way. However, most employers do not off er such choices. Th e employer, the decision-making purchaser of the And one employer changing to this model would not insurance, is not a cost-conscious consumer, but rather get the benefi t of a fully competitive health-care system a middleman trapped between the demands of insurers so long as most other employers did not do the same. and employees.r Instead, the prevailing practice is that a health insurer To provide some measure of “choice,” some fi rms give will ask, or demand, that an employer give that insurer all their business to one insurance carrier, but the 100 percent of its business. Insurers dislike “slice busi- carrier off ers two or three “plan designs” (for example, ness,” where they must compete for some employees a Preferred-Provider Organization or “PPO”, and an within a small group, because of an understandable HMO, or an HDHP). However, most often, all of concern over high administrative costs per insured these plans market the services of the same unaffi li- worker, and the instability that can be caused by ated FFS doctors. Th is choice of “plan designs” is not “adverse selection,” when one competing carrier winds competition either among carriers or delivery systems up with all of the sick employees in the small pool. and does not increase the effi ciency of uncontrolled Employers, in turn, appreciate the administrative FFS. For example, such “carrier HMOs” stand in the simplicity and savings that come from dealing with diffi cult position between patients who want to receive only one insurance carrier.p However, those employers more services, and FFS doctors who want to perform are caught on the other side of the transaction by more services, trying to impose restraint. Carrier employees who want to be able to choose their own HMO costs simply rise with industry costs. doctors, rather than being dictated to by their employer or insurer. Th ese demands of a single insurer and Th e absence of meaningful choices of health plans employees who want to choose their own doctors leave extends across fi rms of all sizes. Small businesses the employer with no options. Th e one type of plan can be locked out of insurance altogether because of a that can satisfy both the insurer and the employees pre-existing health risk, or because of high prices, or is a wide-access fee-for-service plan. Multiplied over because of the high per-worker cost of plan administra- thousands of employers, this conundrum dictates that tion; and small-employer work forces are not large fee-for-service medicine dominates the delivery of enough to be attractive risk pools for insurers. Only health care. 42 percent of workers in fi rms with 3 to 24 employees, and only 51 percent in fi rms with 25 to 49 employees, In such an environment, devoid of competition, the are covered by their employer’s health benefi ts.37 dominant FFS system contains incentives for over-use, Medium-sized fi rms, and small businesses that do under-use and misuse of medical technology.36,q Other manage to off er coverage, are usually constrained to the than revenues, there is no market-driven measure of a

p Th e tendency of insurers to demand and receive 100 percent of each employer’s business has a perverse side eff ect, in that it makes it more diffi cult for new insurers and providers to enter the business and enhance competition. A potential new entrant runs the risk of failing to win any one of the small number of large employer contracts, and thus never getting off the ground. In contrast, if individuals chose their own insurers and providers, it would be more likely that a new fi rm could attract enough business to have a chance at success. q See Appendix B for a detailed background and analysis of FFS. r Traditional FFS has largely been replaced by wide-access “preferred-provider organizations” (PPOs). PPOs are nearly all-inclusive networks of FFS providers who do not set their own fees, but rather accept the network’s negotiated fees as payment in full. But the PPO is a change more in form than substance; PPOs do not increase the effi ciency of the delivery system or hold down prices. Usually, employers off er a single PPO so that every employee can choose any doctor. Because providers know that these networks must include them to give customers their choice of doctors, the networks are not in a position to drive hard bargains; they cannot exclude many providers. Th e premium of a PPO refl ects the effi ciency of all the participating providers in the community, not just the effi cient ones.

17 services of one insurance carrier because of insurers’ and the kinds of coverage that employees – rather than aversion to “slice business,” described above. Even large their employers – want. fi rms sometimes off er employees only one plan, or one Employers like the state of Wisconsin, the University carrier (including arrangements under self-insurance), of California, Wells Fargo and Hewlett-Packard, often because of past collective bargaining agreements. which off er their employees fully cost-conscious choices And even large fi rms that do off er distinct choices, as among delivery systems, often fi nd that 75 to 80 noted earlier, sometimes cover a high fi xed percentage percent choose among the least-expensive plans which, – 80 percent, or even 100 percent – of the premium in these cases, are group-practice-based HMOs. With of whatever plan the employee chooses, again often a price-sensitive choice, many people choose a delivery driven by collective bargaining. model other than FFS – unlike most other employer In sum, most employers off er a single insurance carrier, arrangements in which employees have no choice of because insurers give them incentives or even require carrier or little or no incentive to choose a lower-priced them to do so – through minimum participation plan. Th e federal government’s experience as an requirements or off ers of better prices if they can cover employer is similar.t Under the FEHBP, which gives the entire group.s Employers with a single carrier are employees multiple choices of health plans and also a often constrained to off er a single wide-access FFS semi-fi xed-dollar contribution, delivery systems other plan. As a result, there is no reward to insurers to than FFS often do well in their localities.u provide good coverage at low prices – and little or no consumer pressure for them to do so. With limited Conclusion incentives for better performance, it is not surprising that the health-care sector has seen rising prices with Th us, the current employer-based health-insurance little or no improvement in health outcomes. Further- system is devoid of competition and incentives to more, and fundamentally, it is really employers who improve effi ciency. It is not surprising that costs have choose the health plans for their employees. With all risen faster than quality, and it is not likely that this of the good will in the world, there is no reason why outcome will change on its own. employers, rather than the employees themselves, Since World War II, the United States has experi- should be choosing health-care coverage. If employees enced pressure for health-care reform every ten to had choices, and if they could reap the savings of a fi fteen years. Th e current episode, however, may be choice of a less-expensive plan, it is likely that insurers the most serious. More Americans now recognize that and health-care providers would try to fi nd more- their health-care coverage is fragile – that the loss of a effi cient ways of providing better health-care results, job, or the terms of a fi rst job, or the onset of an illness

s Employers often evaluate insurance carriers on their administrative costs and profi ts, or “retentions,” apparently not realizing that some administra- tive investments, such as in provider profi ling and incentives, practice guidelines and information technology, can yield cost savings in the long run. t Th e federal government also purchases health care for the elderly, and for current and former military personnel. In contrast, to the FEHBP ex- perience, FFS predominates in Medicare, with no politically acceptable way to subject FFS to eff ective competition from more effi cient alternatives. Th e Veterans Administration Health System (VAH) and DOD TriCare have operated their own integrated delivery systems for some time – and there has been great innovation, especially in the Veterans Administration, in such areas as chronic disease management and adoption of electronic health records. In the latter case, the VAH clearly leads the private sector. u Th ere is an important defi ciency and infl ationary bias in the structure of the FEHBP. Th e government, as employer, contributes an amount set at 70 percent of the average price of the largest plans in the system. If a plan were to come in with a premium below the contribution level, the employee would get to keep 25 percent of the diff erence while the government would keep 75 percent. After tax, the employee would keep less, perhaps as little as 15 percent. So there is not much incentive for a plan to off er prices below the average and attempt to attract more customers. Also, there is an artifact in the pricing scheme that works to the disadvantage of HMOs in the FEHBP. Th e program contains several nationwide fee-for-service plans whose premiums refl ect costs averaged over the whole nation, including many low-cost areas. HMOs, on the other hand, are local entities, and those in high cost metropolitan areas must bear the costs associated with doing business in those areas. HMOs tend to be in metropolitan areas. Th e pro- gram would do a better job of promoting competition if it used regional pricing.

18 can lead to loss of coverage and fi nancial ruin, if not the lack of necessary care. Why has this happened? Under our current health- care delivery system, dominated by FFS solo-practice medicine, costs are growing unsustainably, and quality and access are unacceptable. We pay more of our GDP for health care than any other country around the world, but our nation’s health outcomes are far below average. Certainly, something must change. Arguably, continuing the FFS model, largely sheltered from competition and therefore lacking innovation in organization and process, has contributed to cost increases without improving access or most dimensions of quality. Many Americans hope to continue to receive health care through the traditional health-care delivery model. Although technological innovation might make that possible, the unaltered status quo is not an option. Ignoring the mounting costs will result in the loss of access – and hence severe harm – to an unfortu- nate segment of our population that is already too large and growing rapidly. In virtually every other sector of the U.S. economy, competition has led to great and unpredictable change, but in the end to greater value for the consumer. More-eff ective competition in the health-care sector could only be expected to do the same. Although we cannot predict precisely what new health-care delivery models might emerge – perhaps even a revitalized FFS model – we can predict that consumers, empowered with choices and information about both cost and quality, will drive the health-care sector toward better outcomes – and perhaps avoid the three-way collision of cost, access and quality that now appears imminent.

19 20 Chapter Two: Why 35 Years of “Band-Aids” on a Fundamentally Flawed System Did Not Work

Over at least the last 35 years, there has been a slowly integrated-delivery systems). Both of these employer building realization that our health-care system is not practices deny employees the opportunity to save sustainable. Costs are growing so rapidly that at some money and pay lower premiums by choosing less-costly not-far-off date, our economy will no longer be able health-care systems. to bear them. Even those who are satisfi ed with their Furthermore, our traditional health-care system is current health-insurance arrangements have become oriented toward acute episodes, where people go to the less secure for the future. Even those who are most doctor when symptoms arise, and pay for the services confi dent that their own health insurance is secure delivered at that time, with little emphasis on follow- must see that more and more people have no cover- up and continuing care. But health expenditures are age, to the detriment of our entire society. And even now dominated by the care of people with chronic con- hardworking practitioners must see that the current ditions, and this traditional system does not provide system eventually must change. the incentives or the fi nancial foundation to build an Public policymakers and private actors have tried to infrastructure for chronic disease prevention and man- respond, but today’s health-care system provides no agement. Th is failing is exacerbated as people change incentive to individual doctors and patients to pursue jobs with increasing frequency, and then fi nd that they cost-effi cient medicine. Accordingly, America has a must change both health insurers and providers. discouraging history of patching the fundamentally Th ere was and is little understanding of the basic fl awed system with simplistic, partial “solutions” – problems of incentives and organization. Indeed, in veritable “Band-Aids” – each of which was supposed the 1970s, most people thought that fi nancial incen- to solve, or signifi cantly mitigate, our uncontrolled tives and organization were irrelevant to health care. health-expenditure growth. Some of these approaches Legislatures and citizens were reluctant to address contained germs of good ideas, and some of them could the fundamental problems and eager to fi nd painless contribute to a rational comprehensive solution; but incremental solutions – veritable “Band-Aids.” Here is none of them came close to addressing our fundamen- a list of some of them, in roughly chronological order: tal structural problems. Waste, fraud and abuse (WFA) was the perceived Th e basic problem has been and remains that the villain in 1972. Hence, the solution would be more whole health-care fi nancing system rests on infl ation- lawyers, inspectors, and penalties for fraud. WFA is ary foundations. Th e incentives and the organization still present on a large scale more than 30 years later. of health care work against aff ordable care in both the It received honorable mention in the Medicare Pre- public and private sectors. In the private-employment scription Drug, Improvement and Modernization Act sector, most employees have been locked into fee-for- of 2003. Th e very structure of the traditional model service (formerly indemnity insurance, now PPOs) invites it. Harvard’s Malcolm Sparrow characterized without a choice. Medicare, also, is predominantly fee-for-service as “a license to steal.”38 Action against fee-for-service. As explained in Chapter One and WFA had some successes, but rapid health-care cost Appendix B, FFS rewards the delivery of more services, growth continued. If the root problem of our health- regardless of quality or effi cacy. Few employers off er care system truly were outright fraud and abuse, it employees choices among delivery systems, and if they would be relatively easy to solve, because it would do off er a choice, they often systematically pay more require only the identifi cation and apprehension of on behalf of the more costly plans (often fee-for-service a comparative few practitioners whose motives were plans) than on behalf of the less costly plans (usually

21 outright greed. Unfortunately, the problem is far more based on medical evidence and persuasive to doctors, complex, involving well-intended behavior within a simply did not exist. system that provides every incentive for over-utilization Th en the Congress created Peer Review Organizations and no incentive for cost-consciousness. – contract police forces to challenge over-utilization. Th en the problem was identifi ed as excess capacity, so Th ey failed, partly for the same reasons as PSROs: it is the new “big thing” became Certifi cate of Need (CON) hard to second-guess the doctor’s care for the patient, laws and “health systems agencies” to prevent building especially after the fact, and especially if one is not a unnecessary capacity. Th ese measures failed because doctor caring for similar patients. Cost-effi cient medi- there was no incentive to match capacity to need. cine requires a system that involves the doctor prospec- Regulators could not stop building in the teeth of eco- tively – not merely a set of rules, or worse still a single nomic incentives to do more with the facilities that al- reviewer, imposed upon him or her after the fact. ready existed. If a doctor and a patient believed that a Th en came what could have been a signifi cant part of a marginal test or procedure might provide some benefi t, genuine solution, the Health Maintenance Organiza- however small, and the facilities to provide that test or tion Act of 1973. Importantly, it sought refi nement of procedure were available, the facilities would be used – delivery systems, and competition among alternative therefore demonstrating the “need” for those facilities, systems, to achieve greater cost-effi ciency. At the time, and the “need” to build more. Studies showed CON the leading alternative modes of organization were had no eff ect on overall spending.39 group practice HMOs and individual practice HMOs. Th en President Richard Nixon imposed price controls. In those days, “HMO” referred to a delivery system, But experience showed that the doctors made up the not just to an insurance contract. Competition from lost income by increasing volume. Th e system implod- HMOs helped, but it failed to achieve its potential be- ed in complexity over the requirement that regulators cause employers and government failed to create wide- use due process and just compensation. “Just compen- spread cost-conscious individual consumer choice so sation” becomes a fair rate of return, which becomes that there would be a market for cost-eff ective care. In- cost reimbursement, and providers have the ultimate stead, the vast majority of individual health-care con- power to increase costs by providing more services. sumers either did not have a choice of a more-effi cient, less-expensive health-insurance plan, or, if they had President Carter wanted price controls on hospitals the choice, would not keep the savings from choosing but could not get them enacted. Th e hospital asso- the more-effi cient system. Many employers fulfi lled ciations and the medical associations opposed them the HMO Act’s legal requirement not to discriminate vigorously. One of their proposed alternative weapons against HMOs by paying the same 80 to 100 percent against cost growth was “the voluntary eff ort” (“the of the premium of the plan of the employee’s choice, VE”). Providers of health care would solve the prob- whether it was fee-for-service or HMO. Th is deprived lem by voluntary action. Th e voluntary eff ort had no HMOs of the opportunity to market cost-eff ective- lasting eff ect. ness, because the employee who chose a lower-priced Th en the problem was identifi ed as excess utilization HMO would save either nothing (if the employer paid of services, and the answer became Utilization Review 100 percent of any premium) or only 20 percent (if the and Professional Standards Review Organizations employer paid 80 percent) of the diff erence. Policy- (PSROs). PSROs were local non-profi t physician makers simply assumed that there would be a market cooperatives that were supposed to detect overuse and for economical health care without carefully examining admonish overusers. Th ey failed, because there was no employer practices. Th e HMO Act should have been incentive for local doctor groups to curtail local spend- accompanied by more-fundamental and far-reaching ing when so much of the money came from elsewhere. reform of the EBI system, but there was not the vision A dollar saved in Des Moines was a dollar returned or the felt need at that time. to Washington.40 Why would anyone in Des Moines Th e Prospective Payment System (PPS) for Medicare want to do that? Moreover, and probably more impor- payments to hospitals was a logical and signifi cant tantly, meaningful standards of appropriate utilization, step toward a more-economical health-care system: it

22 improved incentives for hospitals by requiring them administration rejected strong recommendations to to accept responsibility for managing at least a signifi - cap the exclusion of employer contributions for health cant part of the cost of care. Under PPS, hospitals are insurance from employee taxable income. “Competi- paid a pre-determined fee for each Medicare admis- tion” was assumed to be whatever happened in the sion, based on the diagnosis. Th us hospitals would not health-care market, however fl awed that market might increase their income by providing marginal services, be. and would save money by increasing effi ciency.41 It was Th en Congress adopted the resource-based relative a big success for a time after its introduction in 1983. value scale governing Medicare fees for doctors, in a However, it is limited to inpatient care, and much care sense expanding PPS from the hospital segment of the escapes the limits on inpatient services. It does not program. Like PPS, this was a good idea with limited include physician inpatient services (which the Neth- reach. Its goal was a rational basis for Medicare fees, to erlands has included in its version of PPS for some take excess profi t out of some services, especially proce- years). Also, it does not reward the prevention of inap- dures, and to assure adequate payment for evaluation propriate care, or of the need for hospitalization in the and management services. But Medicare is still fee-for- fi rst place. Th e latter point is especially important. As service, and doctors increase volume to protect them- was documented in Chapter One, chronic conditions selves from loss of income when fees are cut. In fact, are perhaps the key driver of health-care costs, and this Medicare has an offi ce whose mission is to estimate the is particularly true of Medicare. In 1987, 31.0 percent volume response to fee cuts. In any case, government of benefi ciaries were treated for fi ve or more chronic simply cannot set all of the hundreds, or even thou- conditions; in 2002, it was 50.2 percent. Chronic ill- sands, of prices at effi cient levels. In addition, govern- ness is responsible for virtually all Medicare spending ment control makes such prices political prizes.44 growth. In 1987, benefi ciaries with fi ve or more chron- ic conditions accounted for 52.2 percent of all Medi- In the 1990s, many had great hopes for “managed care spending; in 2002, it was 76.3 percent.42 Persons care,” which promised to improve the mode of organi- with, or at risk of acquiring, several important chronic zation of medical care. However, what transpired was conditions need far-more-coordinated treatment and mostly insurance companies marketing the services of counseling than is provided by the traditional medical solo-practice fee-for-service doctors in “carrier HMOs,” model, under which the patient chooses to see the doc- under a comprehensive-care contract characteristic of tor only when symptoms arise.43 Although PPS was HMOs, without reorganizing the fragmented, uncoor- successful on its own terms, the unsustainable growth dinated delivery system.a As under traditional fee-for- of Medicare is very much still with us. service medicine, the doctors wanted to do everything they could for their patients, and the patients wanted In the early 1980s, “competition” became the “magic anything that might help them; so the insurance com- bullet,” but government and employers did not change panies found themselves in the uncomfortable position the market to make consumers cost-conscious, and so of standing between wanting patients and willing doc- competition did not happen. President Reagan advo- tors. A backlash followed because employers forced cated “free markets” and dismantled ineff ective regula- many people into “managed care” without a choice and tion, but he did not act to create a functioning market without visible sharing of the savings, and without of competing delivery systems. His administration much explanation of what was happening or why. even let expire the provision in the HMO Act that required employers to off er choices of HMOs, which Understandably, people want to choose their doc- had at least encouraged some competition among tors. Th ey do not believe their employers should make diff erent modes of organizing care. And the Reagan that choice for them. Delivery systems that seek to

a Some of the “carrier HMOs” were mostly about restraint, not about reorganizing care, though some, like Prudential, actually built delivery systems of group practices, and others like Health Net, Pacifi Care, and Blue Shield and Blue Cross of California contracted on a per capita prepayment basis with existing multi-specialty group practices that were willing to accept responsibility to manage care and costs.

23 increase effi ciency typically select doctors. So people such responsibility relative to conventional insurance. must have a choice among delivery systems that limit Th e assumed increased consumer involvement in medi- the choices of providers, or a choice of whether to be in cal-care choices is probably the more critical element. such plans at all. Research has shown that the dissat- To some degree, this assumption is probably based on isfaction with managed care was concentrated among the computer revolution. CDHP anticipates that, as people who were assigned to it without a choice.45 To in other phases of life, consumers will use the Internet assign people to HMOs without a choice is to invite and other information resources to make more-cost- a backlash or to force HMOs to have very wide all- effi cient health-care choices: shopping for the cheapest inclusive networks. Doing the latter reduces managed provider, learning about the implications of alterna- care to FFS in states with “any-willing-provider” laws. tive treatments and therapies, and so on. CDHP calls Managed care was not allowed to “interfere” with the for providers to release comprehensive information on way medicine was practiced, and it was not allowed to their quality and prices, which would be incontrovert- select providers. If managed care is forced to mimic ibly desirable, but would require a major change from FFS, it cannot innovate and develop systems diff erent current practice. Th e availability of computer-based from FFS, and there is no reason to expect that it can health records would facilitate consumer responsibility. sustain any signifi cant cost reduction. First recommended in the Institute of Medicine report, “Crossing the Quality Chasm,” this advance gives the Why One Popular Idea – the Consumer- consumer access to and control over his or her entire Directed Health Plan – Will Not Work life-long medical record. Such records generally do not President Bush and some in the Congress have favored now exist. Th e coming evolution of consumer choice High-Deductible Health Plans (HDHPs), also known of treatments and therapies, and the opportunities sur- as Consumer-Directed Health Plans (CDHPs). Th is rounding personal computerized health records, are approach is sometimes billed as close to a complete both uncertain. answer for the problems of the nation’s health-care sys- Th is kind of information could be used to plan health tem, and some fi rms have introduced plans along these care under any kind of insurance policy. Would it lines. Will these plans help to close the gap between work to control costs in a CDHP? Consider the other NHE growth and GDP growth? element in this model. Firms have acted well to use the CDHP model to ob- High-Deductible Health Insurance. CDHPs require tain coverage for their employees who otherwise would the insured to pay the fi rst dollars (usually $1,000 to have none. CDHP coverage clearly has value. How- $2,500) of health-care expense (that is, the “deduct- ever, we are skeptical that CDHP will stop the deterio- ible”) before the insurer begins to pay the bills. Some ration of employer-based insurance and the unsustain- CDHPs are associated with health savings accounts able growth of health-care costs. (HSAs), a new tax break in the Medicare Moderniza- Fundamentally, CDHP is not one variation on exist- tion Act of 2003 intended to encourage the choice of ing mainstream health insurance, but a combination of high deductibles by equalizing the tax treatment of two. It is helpful to analyze those two parts separately, out-of-pocket spending and spending through tax- and then to consider the implications of putting them favored insurance. In some instances, the employer together. makes deposits into the HSA for the employee, either independently or as a match; in other instances, the Consumer Direction. Many experts have argued for employee alone is responsible for funding the HSA. some time that consumers must accept more responsi- Employer contributions to HSAs are tax-free, and bility for their health, including both managing their employee contributions are tax-deductible, even if the habits (diet, smoking, alcohol, exercise) and choosing employee does not itemize other deductions.b Th e their providers and treatments. Consumer-directed limit on tax-sheltered savings is the deductible in the health plans generally assume an increased measure of health-insurance plan, up to $5,650 (for families) b Th at is, employee contributions are excluded from adjusted gross income (AGI) independent of the decision to itemize deductions.

24 in 2007. Th e balance in an HSA can be withdrawn services and what they cost, and to have some personal without tax to pay for care up to the high deductibles reason to care, as they would to the degree that they associated with the CDHP insurance policy. Unspent had to shop and pay for the fi rst $1,000 to $2,500 of balances in HSAs can be rolled over from year to year annual expenditure. However, health expenditures are without tax.c very concentrated on relatively few people.46 In 2002, as noted in the previous chapter, 80 percent of health Th e rationale for CDHPs is that the incentive of the expenses were incurred by people with costs exceeding high deductible will induce the consumer to economize $3,219. Th us, in any given year, well over 80 percent on health care; after all, it is the consumer’s money. of health expenditure dollars will be spent on people Having an HSA is expected to mitigate any cost who have exceeded any reasonable level of deductibles problems in meeting the deductible for consumers of or can safely expect to do so. Recalling that 83 percent modest means. In addition, many CDHPs waive the of health expenditures are on people with one or more deductible for preventive care, which is supposed to en- chronic conditions, many people with chronic condi- courage consumers to keep close tabs on their health. tions will expect to reach their deductibles. Certainly, Th us, putting the two elements together, the result is anyone who has been an inpatient in a hospital, or is somewhat analogous to the shift from a defi ned-benefi t likely to enter a hospital, will have reason to believe pension plan to a defi ned-contribution plan. Under that he or she will exceed any insurance deductible.47 conventional health insurance, individuals undertake For those who expect they will exceed their annual less risk (and can choose to have less responsibility for deductibles, the marginal cost of more care will be their treatment choices), and pay higher premiums small, probably zero – depending on whether their so that others take on those responsibilities. Under plans involve co-payments (which are usually relatively CDHP, individuals are at risk for the deductible, and small percentages – if not zero – for spending above might be expected to be more involved in treatment their deductibles). In any event, the marginal cost will choices for that reason, while paying a lower pre- certainly not be enough to aff ect their decisions once mium in exchange for taking on those responsibilities they are hospitalized. Th e RAND experiment to test themselves. the eff ects of coinsurance found that once people were hospitalized, coinsurance had no eff ect on spending.48 In other words, consumers would be expected to en- gage in preventive care; and then, when illness or injury Second, once CDHP enrollees have reached their strikes, to use the latest information technology to deductibles, they will in eff ect be in fee-for-service fi nd the most economical and effi cient therapies and medicine – to be precise, usually in wide-access PPOs, treatments, to minimize spending under the CDHP which are fragmented, uncoordinated FFS arrange- deductible, and to protect the balance in the HSA. In ments. Th ere is no expenditure restraint in such this way, it is claimed, total health-care costs would be systems, only incentives to give and receive more care. brought under control. Some have argued that once consumers have built the habit of shopping for price within the amounts Is this outcome likely? Th ere are several reasons to of their deductibles, they will continue to try to cut be skeptical. First, it is unlikely that health-insurance costs even when they exceed their deductibles, and deductibles in the realistic $1,000 to $2,500 per-year their insurance reimburses 100 percent of further range (any higher amount would likely force many costs. Although it is impossible to rule out such behav- families without employer contributions to HSAs ior, clearly there would be no economic incentive for and with modest incomes and health problems to go consumers to do so – especially given that high health without care) would provide any meaningful incentive expenditures can indicate serious health problems, for to reduce total health-care costs. It certainly would which consumers likely would want all of the best pos- be desirable for people to know the quality of medical sible care. c Apart from the word “health” in the name, HSAs can for some affl uent persons be mainly a tax deferral device. If withdrawn for non-medical purposes, the withdrawals are subject to income tax plus a 10 percent penalty. However, if the balances are not used until the owner becomes eligible for Medicare, the 10 percent penalty is waived. If the owner passes away, the balances can be bequeathed to the individual’s heirs, and the 10 percent penalty is waived.

25 Th ird, the main appeal of CDHPs is to consum- life styles and behavior, support them in their eff orts, ers who have reason to believe that they will remain and monitor their medications. Health-care organi- healthy, and thus will be able to build their HSAs. To zation and fi nance should provide the foundation for that extent, the resulting migration of healthy people disease-management infrastructure. However, CDHP from the remaining pool of risks will shift the costs assumes that a key to economy is keeping people away mainly to people with chronic conditions who will not from the doctor, which might be true for acute care in choose CDHPs because they would expect to exhaust uncoordinated fee-for-service, but is not for the many their deductibles. people having and developing chronic diseases. CDHP moves in the wrong direction – attempting to keep CDHPs will be especially advantageous to those who people away from health care rather than reaching out are both healthy and wealthy, because they can both to support them in improving their lifestyles and man- aff ord the higher deductibles and take the most advan- aging their conditions to keep them out of the hospital tage of the HSA tax shelter. For high-bracket taxpay- and away from more costly complications. ers, those most likely to receive such large employer contributions, the tax savings on HSAs will be worth To be fair, many advocates of CDHP would exempt over $1,900 a year, plus possibly additional savings preventive care from deductibles and co-pays. But in from state income taxes, plus tax-free accumula- equal fairness, it is by no means clear that such exemp- tions – a very attractive opportunity to shelter income tions would work in a system whose entire philosophy from taxes. Because the HSA is an exclusion from is to keep people away from their physicians. For adjusted gross income, the tax benefi t is most valu- example, it is far from certain that those who enroll able to the best-off taxpayers who are in the highest in CDHPs because they cannot aff ord the higher tax-rate brackets, but is worth next to nothing to those premiums for conventional insurance, but equally households with lower incomes who face low or even cannot aff ord the high CDHP deductibles, will go to zero-percent tax rates, who are also less likely to receive the doctor for exempt preventive care when they know employer contributions to HSAs. In 2005, 35 percent that they cannot aff ord any non-exempt treatments or of fi rms off ering HDHPs made no contribution to therapies that the doctor might recommend. If people the employees’ HSAs.49 Healthy, well-off persons in forgo prevention, it could lead to under-funding of CDHPs also benefi t from the lower premiums and can primary care, and could reinforce the present trend of escape pooling risks with their less-fortunate fellow young American doctors not going into primary care. employees. Favorable risk selection will help CDHPs Primary-care physicians could have increased diffi culty to grow rapidly, while leaving the higher risks behind collecting their bills, because those costs would be the in the standard low-deductible plans. But the loser ones to which deductibles would most likely apply. may be the fairness of our private health-care fi nancing Interestingly enough, 22 percent of large employers system – not to mention the viability of health insur- now off er in-house clinics to their employees, to make ance for those who are not fortunate enough to benefi t access to the doctor more convenient, while CDHPs from CDHPs. seek to discourage doctor visits.53 Alternatively, advo- cates of CDHP have expressed concern that common Fourth, about 83 percent of health-care spending is low-deductible policies have led to over-utilization, and associated with the 133 million Americans who suf- yet Americans still have under-utilized preventive care. fer from chronic conditions: hypertension, arthritis, Should we expect that CDHPs would yield more use asthma, cancer, heart disease, AIDS, diabetes and of preventive care, when the CDHP’s terms for that its consequences including renal failure, etc.50 Th ese care are no more generous than those under current persons need to be, in the words of the Institute of low-deductible policies? Medicine (IOM), in “continuous healing relationships” with their health-care system.51 Obesity is epidemic, Fifth, CDHP emphasizes the decisions of informed which will lead to many problems of heart disease, consumers, a model that may seem to fi t well with a diabetes, etc.52 Th e costs will ultimately be borne by population of professors in universities with medical all of us through Medicare, Medicaid, and disabil- schools whose families have enough free time to keep ity insurance. Our health-care delivery system must up with the medical literature, but that makes less teach and motivate these patients to adopt healthier sense for others. Th ese consumers are supposed to

26 shop confi dently for doctors and negotiate with them Another description of this approach is “Medicare for over prices and treatments. However, medical care all;” in other words, every American would be covered is very complex and uncertain. John E. Wennberg’s by the Medicare program or something very similar.g research has documented remarkably wide variations In 2006, the California Legislature passed a single- in physician practice patterns, indicating that most payer bill. Single-payer proposals have also appeared as doctors do not have a very well-informed idea of the ballot initiatives in California, but they usually have not best practice.54 Typical Americans are surely no better fared well. Th at could change, and probably will if the informed. Only recently, the most famous heart consequences of soaring insurance costs are allowed to bypass graft patient in America, former President Bill play out. Clinton, living in the state with the best outcomes- As an alternative in the United States today, this related information, chose the hospital with the high- model has features with great appeal. For one thing, est risk-adjusted mortality in the state.55 His choice everyone is covered in the most familiar models, arguably did not fi t well with the CDHP model. More eliminating the complexities of determining who is broadly, the experience in New York has been that covered, and by which program.h Th ere would be huge the publication of such quality-related information administrative simplifi cation. All providers would bill did not drive changes in market share.d Arguably, the the government, or its agent, on a uniform claim form information requirements for choices among individual and be paid a uniform fee. In Canada, doctors bill providers and treatments are much greater than those the province on a claim form that looks like a credit- to make an informed choice of a care system. Th us, it card charge slip. Canadians and American Medicare makes more sense to ask consumers to shop based on benefi ciaries have access to practically every doctor in standardized, published quality information during the jurisdiction, with no network restrictions, although a routine open season for a cost-effi cient health-care that is changing as doctors decline to take new plan, rather than to require them to shop perhaps in a Medicare patients in response to Medicare fee reduc- time of crisis when they need an expensive and poten- tions. Th ere would be no marketing and underwriting tially life-saving treatment or therapy.e expenses of insurance companies dealing with many individual employers, because there would be no more Why Canada’s “Single-Payer” System insurance companies (other than as claims processors or “Medicare for All” Will Not Solve Our or vendors of supplemental insurance). Health insur- Health-Care Problems* ance would be removed as a factor in the labor market. Beyond Consumer-Directed Health Plans, another Employers could eliminate their bureaucracies for health reform idea with substantial support is a “single- dealing with health insurance and forget about health payer” system, of which Canada’s is a prominent care (except when they paid their taxes). Altogether, example. Many people think that the logical replace- some 15 percent to 20 percent of the costs associated ment for the employment-based system would be a with health insurance could be eliminated, including Canadian-style system. Th at is, government, probably the costs of brokers and agents, and employer costs of at the federal level, would serve as the single health retaining staff s and consultants to help manage health- insurer, cover everyone, and pay all bills according to coverage purchasing. a government-determined or negotiated fee schedule.f

*See Memorandum, page 84. d What changes in performance there were apparently came from extra-market forces such as state regulation, or the threat of it, and from the pro- fessional aspirations of doctors and hospital managements and boards, most of whom wanted to be among the best. e Physicians in prepaid group practices take part in systems that accept responsibility to manage total per capita expenditure of their enrolled mem- bers. Th ere is a great deal of evidence that they do the best job. f In Canada, hospitals are paid prospective “global budgets.” g Th ere are many alternative ways for government to play a role in health insurance that might be characterized as “single payer.” Th e Canadian-style or “Medicare for all” approach is the most prominent, and the most widely understood. We do not consider a system under which the Federal gov- ernment would collect premiums (or taxes) and pay them to a multiplicity of private insurers who accepted the risks of coverage to be a “single-payer” system in this sense. h Th is aspect of single-payer plans can be more complicated if aliens or non-working non-elderly adults are not covered.

27 Single-payer models are generally based on fee-for- Th ere are other problems with single-payer systems. service payment because, if there is only one system, Perhaps the next most important one is the entangle- then all physicians must be allowed to participate, and ment of provider payment with politics. Th e medical- most are in small or solo practice which is most conve- industrial complex already is a huge source of political niently reimbursed by FFS. In a sense, government, as money. Medical device companies and drug companies the sole provider of health care, would fi nd itself in the employ persons in many Congressional districts, either same position as an individual employer: Because its directly or through contractors. Every Congressional constituents want an unconstrained choice of physi- district has doctors and hospitals. If all of their reve- cian, the only single plan that meets that constraint is nues fl owed through government, attempts to infl uence a wide-access fee-for-service system. Indeed, govern- the allocation of funds through lobbying and political ment’s ability to restructure the health-delivery system contributions would intensify. Payment by govern- could be even less than a typical employer’s. Because ment would become, literally, a matter of life and death of “job lock,” an employer has at least some theoreti- to health-care providers. cal ability to impose its health-care decisions on its Some think that a single payer would be able to con- employees. In contrast, because of elections, public trol health expenditures. But government today is policymakers can be fi red if a signifi cant bloc of their having a very diffi cult time controlling the costs of its constituents believes that their choice of physician has existing health commitments to Medicare and Med- been constrained. As experience under Medicare has icaid. Merely regulating prices cannot control health demonstrated, any U.S. single-payer system is likely expenditures. Expenditures are the product of prices to maintain fee-for-service medicine as the dominant and quantities, and squeezing down on prices moti- delivery mode.i vates a “volume response” – that is, doctors react to a Depending on one’s point of view, the continued domi- reduction of prices by increasing the volume of ser- nance of fee-for-service would be an advantage or a ma- vices they provide. Experience with Medicare bears jor disadvantage. It would be familiar, and administra- this out.56 Congress has responded with a “sustainable tive processes exist. Most doctors and medical groups growth rate” formula: What the doctors take collec- are paid that way today and prefer it. tively through increased utilization will be recaptured through lower fees across the board. Obviously, that is However, for the organization of medical care and its hardly an optimal system. It punishes the frugal along impact on economy and quality, locking in uncoor- with the prodigal. It remains to be seen if it will be dinated, fragmented fee-for-service would be a major sustained. So far, its implementation has been post- disadvantage. As noted above and in Appendix B, fee- poned each year because of the objections of the medi- for-service has built-in incentives for delivering volume, cal profession. not quality. It motivates, or is compatible with, con- siderable over-use, under-use, and misuse of services. Government simply cannot know how to set so many It would leave in place existing medical organization, and such complex prices, taking account of local mar- with all the defi ciencies of quality and economy dis- ket conditions. Congress must and does use across- cussed in the previous chapter. It would continue to the-board rules for setting prices, and those rules have be oriented to acute episodes – rather than chronic proved hard to change. For example, Medicare has disease management, where most of the cost occurs. It created a boom in cardiology procedures by overpaying would deny us the benefi ts of any potential new and and making them more profi table than other kinds of better-organized delivery systems. In sum, all of the care, which in turn is leading to a boom in heart hospi- organizational fl aws that have rendered the current tals that the Congress is now seeking to curb.57 system infl ationary and unsustainable would remain.

i It has proven practically impossible for Medicare to break out of fee-for-service, even though Congressional leaders have long said that they want to off er choice to benefi ciaries. Medicare does off er HMOs, called “Medicare Advantage” plans, but the amount Medicare pays to those plans is tied to the prevailing fee-for-service per-capita costs (risk-adjusted) in each geographic area. Canada’s Medicare system destroyed their prepaid group prac- tices because the dominant payment system left no opportunity for Canadians to save money by joining more-effi cient delivery systems.

28 Government appears unable to discriminate among In short, for all of its appeal, the single-payer model providers. It is very unlikely that government could suff ers from serious, probably fatal, weaknesses. Al- refuse to deal with providers who appear to be costly though other nations with single-payer systems spend or ineffi cient, if some benefi ciaries – that is, voters – smaller shares of their GDP on health care than the demand their services. To date, Medicare’s attempts United States does, those shares are rising just as in- at incentives for complex-care patients to go to regional exorably. Measures of dissatisfaction with single-payer centers of excellence have foundered. Non-discrimi- systems abroad are growing, just as they are with our nation by any payer is a principle for which provider system. And our own single-payer systems – Medicare organizations will fi ght. and (in some degree) Medicaid – already have their own problems, which are not solely assignable to their Also, government cannot “just say no” to costly new responsibility for the elderly and other groups with technologies. In fact, Congress will not allow Medi- disproportionately ill health. CED concludes that a care administrators even to consider costs in relation single-payer system would not solve our health-care to benefi ts in decisions of whether or not to cover new problems – and in fact may make them even worse. technologies. Th ere is evidence that competing private health-care delivery systems do a better job of cost-ef- fective deployment of new technologies, and targeting Many Other Current Favorite Ideas Are Being Oversold as Solutions in them where they will be really eff ective.58 Themselves; Others Would Not Work Canada is suff ering from long waiting times from primary-care referrals to specialist treatment.59 Global Consumer-Driven Health Plans and single-payer budgets do not create incentives for effi ciency, which health systems are probably the two biggest “big new could ameliorate the problem.j It is interesting that the things” in the dialog on health reform, but there are British are moving in the direction of market models many other popular ideas that are smaller in scope. and incentives reform. Some would have positive eff ects, but are often over- sold as total answers to the health-care cost problem – Single-payer systems, like Medicare, are touted as which they are not. Other ideas would have no favor- having great administrative effi ciency. Medicare, for able eff ect, or even would be retrograde. Th ese ideas example, has been estimated to spend 3.6 percent of are the successors to the “Band-Aids” of the 1970s, billings on administration, whereas private insurers 1980s, and 1990s. spend 11.5 percent.60 However, this is not unalloyed good news for Medicare. Because Medicare is mostly One idea that has generated much excitement is In- fee-for-service, it entails enormous numbers of billings, formation Technology (IT). Th is seems like a safe with the result that there is considerable opportunity course for politicians; it off ers glitter without appar- for error and abuse. As was noted earlier, the Offi ce ently threatening any important interests. IT is being of the Inspector General of the Department of Health ascribed magical powers. In fact, information tech- and Human Service identifi ed signifi cant excessive nology will surely be indispensable in any reformed, and erroneous Medicare payments.61 Th us, the low modern, high-quality delivery system, which is why administrative cost likely results from serious under- the major integrated delivery systems are spending l administration of the program. Single-payer systems billions to roll it out in their practices. But merely have had diffi culty encouraging alternatives to fee-for- superimposing a veneer of IT on top of the current service delivery, but some alternatives – including, but mal-constructed health-care system will not solve the by no means limited to, capitated prepayment – can underlying problems. IT will not help if the delivery reduce administrative cost without necessarily creating system is not reorganized to take advantage of it. In a fundamentally dysfunctional and disorganized delivery opportunities for abuse.k j In Canada, government has limited expenditure growth by limiting hospital budgets, leading to growing waiting lines and shortages of specialist care. k Capitated prepayment is a fi xed periodic per-patient fee to providers, regardless of services delivered. l Th e Veterans Administration Health System, Kaiser Permanente, the Mayo Clinic, and the Palo Alto Clinic, among others, are leaders in the development and application of health IT.

29 system, IT may merely give an ineffi cient system an encourage insurers who paid doctors through capitated electronic means of communication to automate inef- prepayment to use common measures of the quality of fi cient practices. One perceptive analysis pointed out preventive services and patient satisfaction as the basis that deployment of IT is not in the interest of the doc- for additional bonus payments to those doctors.n,63 tors, hospitals, and laboratories in the uncoordinated P4P could establish a single measure of practice quality FFS sector, which probably explains why it is happen- and get away from confusing “dueling report cards.” ing so slowly there.62 Its main limitation is that it is based largely on process measures and not on medical outcomes, which are far To illustrate, consider that a well-organized solo more diffi cult to measure fairly.o P4P made sense in primary-care practice has no particular need for IT for its original context because the physicians involved had itself.m Th e real benefi t from IT adoption in that of- already accepted responsibility for the cost of treating fi ce would accrue to the health-care system as a whole, their patients. But now, P4P is being interpreted as in better informed specialists to whom the patient something that might help limit expenditures in the is referred, with fewer wasted visits, more produc- uncoordinated fee-for-service context. In fact, it might tive visits, less time lost on history taking or tracking even be cost-increasing. With a fundamental shift to down lost information, better coordination between a market based on responsible consumer choice and the specialists and the primary-care physician, and competition among physician organizations to pro- fewer lost or duplicated test results. But these system duce value for money, performance information can be benefi ts would not be benefi ts to individual FFS physi- helpful. cians, who would experience less revenue from fewer visits and tests. And the primary-care practice itself With the prominence of costly chronic conditions, would bear all of the costs of implementing the IT Disease Management is already an integral part of system. No wonder there is slow or no adoption of IT prepaid group practices, whose fi nancing through capi- in the solo-practice FFS sector. Some might mandate tated prepayment provides both the incentive and the the adoption of IT, but this mandate would raise the up-front funds for successful disease management. In same questions as all other government mandates; and contrast to this close fi t with prepaid group practices, adoption would surely be halfhearted, if there were disease management must be tacked on to fee-for-ser- only compulsion and no positive incentive to make the vice, which lacks both the incentive and the fi nancial system truly work. platform. It is being promoted as an optional pro- gram to consumers to overcome the fragmentation of Comprehensive Electronic Health Records would be fee-for-service. Recent data suggest savings are small, an important output of health IT, and a foundation of with both low enrollment and low follow-through by effi cient integrated delivery systems. Prepaid group consumers.64 Disease management is potentially very practices kept longitudinal comprehensive records important, and should be integral to the health-care from the outset, and are now converting them to elec- system, not patched on from the outside. tronic form. Th ey are potentially very important, and they could be very helpful for quality and effi ciency, Evidence-Based Medicine (EBM) is an attempt to but they will not make fragmented fee-for-service af- synthesize the scientifi c literature and detailed health fordable. Th ey may be defeated by the unwillingness records to determine which treatments work un- of FFS doctors to expose their work to competitors der which circumstances and to steer the practice of who might criticize it. medicine toward those treatments. It is important and could improve care, reduce medical uncertainty, Pay for Performance (P4P) was started in Califor- and save money. But those results are not guaran- nia by the Integrated Healthcare Association, to teed. Th ere must be incentives to practice EBM and m However, IT potentially could be a valuable tool for the doctor to use in managing chronic disease patients. n Th is process was a part of the so-called California Delegated Model, under which doctors practice in groups and in independent clinics linked through Independent Practice Associations (IPAs). As noted, the doctors involved receive most of their compensation through annual per-person fees, or capitation. Th ese physician organizations therefore bore some of the risk for resource use, and the bonuses computed using P4P provided an added incentive. o Th e best measurement of outcomes would be adjusted for risk; such measurement would be even more diffi cult.

30 monitoring systems to make it happen, along with Transparency is also cited as a potential overall solu- incentives to choose economical guidelines. Research tion. Transparency is an attribute of all well-function- shows that mere publication of guidelines has no eff ect ing markets. Advocates of transparency in health care on physician behavior.65 argue that consumers, not just insurance company or medical group managers, should know what hospitals Tort Reform could help reduce expenditures and is charge. Of course, purchasers who are using their own surely well worth doing on its own merits.66 Research money or their company’s money need to know the by Kessler and McClellan suggests that, at least in the cost of the things they are buying, and contracting be- case of fresh heart attacks, reform could save fi ve to ten tween insurance companies and providers is now a well percent of costs if there were any incentive to reduce developed, if imperfect, art. But one wonders what the expenditures.67 Five to ten percent is surely signifi cant. ordinary insured consumer with a $2,000 deductible is However, this may prove to be a one-time change in going to do with such information. Th e doctor says: “I the level of expenditures, with no long-term reduction must admit you to the hospital.” Th e consumer thinks: in their growth rate. “Th ere goes my $2,000! Now bring on the technology: Th e goal of Tiered High Performance Networks More scans. More tests. Do anything that might con- (THPN) is to route all patients to high-quality, low- ceivably help me.” If people have reason to believe they cost physicians. Th ose physicians (usually specialists) are likely to reach their annual deductibles, as would are identifi ed using data on the costs and results of be the case with pregnancy, a costly chronic condition, episodes of care (usually acute care) from insurance or any hospitalization, mere $2,000 deductibles will claims. While promising, this approach has impor- provide no cost-reducing incentive. And much higher tant limitations. THPN obviously is designed as a deductibles are likely to make care unaff ordable for cost-saving device for individual employers or insur- average-wage people.68 ers; it has much less relevance to attaining system-wide savings. For example, superimposing THPN on a Conclusion single-payer system would be totally contrary to the ex- perience of Medicare, under which policymakers have Th is history of “Band-Aids” and their latest successors zealously guarded the right of every patient to choose shows that there are no easy, simple reforms – things any physician. that sound good and have popular appeal – that would solve America’s health-care problem. Th ese ideas are It may be misleading to assign every episode of care to attempts, sometimes useful, sometimes not, to control one physician, because there is always some collabora- spending without the “heavy lifting” of reforming the tion in complex cases, and there are diff erences in the market and the delivery system. Excess expenditure severity of those cases. Even assuming that the analy- growth is too fundamental, too pervasive, and is driven sis yields sound results, THPN will do little good if by forces that are too powerful for any such superfi cial employers are unwilling to create suffi cient fi nancial change to be eff ective. incentives to induce patients to switch to economical doctors. Perhaps most importantly, THPN focuses on In contrast, in an effi cient health-care market, all con- specialists and acute-care episodes, and ignores the im- sumers would have informed cost-conscious choices of portant roles of primary care and prevention. Tiered delivery systems. Under such consumer choice, cost-ef- high performance networks could end up with high fective delivery systems would prosper and have strong volumes of preventable medical problems, which even incentives to improve effi ciency, quality and service, if handled effi ciently would not reduce cost. THPN which would drive the entire market toward better could do more good if insurance plans gave people real performance. Such a market would naturally align the incentives to choose economical doctors, and still more incentives of providers with the interests of patients in good if plans had strong systems for primary care and high-quality aff ordable care. Th e next chapter explains prevention that used the data to guide patients to qual- how such an effi cient health-care system would diff er ity cost-eff ective specialists, and to oversee the appro- from the prevailing patterns today. priateness of treatments and procedures.

31 32 Chapter Three: What Might an Equitable, Effi cient, Universal Health-Care Financing and Delivery System Look Like?

Th e above analysis of the current employer-based systems that appear more effi cient within what limited health insurance system is troubling. Costs are rising competition today’s health-care market imposes today. faster than incomes. Firms that have borne a signifi - Th eir attributes also meet the apparent requirements cant share of those costs are threatened fi nancially, es- for a system that would respond to America’s needs for pecially if they are subject to competition from foreign greater quality, aff ordability and access. fi rms that are not so burdened. Employees, especially Th is perspective is far more encouraging. Th ere are those who earn modest wages or already have health systems in place today whose attributes, taken to- problems, are in danger of losing their coverage – if gether, provide an attainable vision of higher-quality, they have not already. Th e history of employer-based more-aff ordable health care. Th ese characteristics insurance is replete with attempts to patch the system, would amount to a fundamental transformation of the with results ranging from minimal benefi t to nil to health-care delivery system. Th eir benefi ts would be outright harm. Options currently on the table, as felt in better health for Americans, as well as dollars- described in the preceding chapter, will fare no better. and-cents resource savings. To approach this apparently dismal prospect from a diff erent angle, what would a successful delivery system Goals look like? As we argued in discussing the single-payer option, we do not believe that an effi cient health-care First, to resolve the problems of health-care cost, qual- system can be managed through a command-and- ity and access, our goal should be a delivery system that control mechanism. Rather, the best approaches to the is moving toward the attributes of the modern fi rm many dimensions of health-care delivery can emerge in virtually every other sector of the economy: from only through a process of competition. unaccountable to accountable; from uncoordinated to coordinated; from wasteful and infl ationary to effi cient Just as competition has produced unpredictable results (seeking maximum value for money for patients), in every other industry, so it would in health care. In with incentives for value-enhancing innovation; from fact, the answer would change constantly, because the provider-centric to patient-centric; a system focused on process of innovation and improvement would never keeping people well, at work, and out of the hospital; stop. Th us, the object of health-system change is not in short, a system committed to improving health to anoint any one delivery model from today’s land- outcomes and reducing health system expenditures, scape as the defi nitive answer, but rather to unleash bringing expenditure growth into line with growth in the forces of competition through structured fi nancial incomes.69 Delivery systems that approximate most incentives to work their will. In time, the successful of these attributes do exist. True competition among systems might even be signifi cant improvements of insurers and providers will encourage the entire health- models that today appear outdated, or alternatively care sector to improve in all of these dimensions. might be models that do not yet exist. Th e one certain thing is that the systems that succeed in a fair, com- Second, because many people lack health insurance, petitive environment will be those that best meet the society must ensure that everyone has aff ordable access needs of the population at large. to a fi nancially sustainable health insurance program. To motivate innovation in health-care organization Despite the uncertainty, some reasonable general and fi nance, everyone should have the purchasing inferences can be drawn on the basis of delivery power needed to buy insurance, and informed,

33 responsible, cost-conscious choices of delivery systems appropriate design and oversight, can drive innovation and providers.a and competition among alternative delivery systems to serve cost-conscious consumers and increase value Th is chapter reviews the attributes of a health-care for money. Without such structural reform, recent fi nancing and delivery system that would meet Amer- eff orts by business and the states will at best postpone, ica’s needs, which are closely related and interact with and in the long run may worsen, the current crisis, one another: postponing as well eff orts to establish a more effi cient • Aff ordability, or in the sense of the entire system, system that is better focused on prevention of chronic sustainability; conditions and maintaining health. • Quality and eff ectiveness; and A sustainable system must build on the eff orts of busi- ness and the states to achieve better care at a lower cost • Access. that grows at a rate closer to the pace of the nation’s incomes. Some key attributes of such a sustainable Sustainability system are explained below. For at least the past 40 years, health expenditures have Incentives Alignment and Effi ciency. Today, most grown faster than incomes and tax revenues. Health- people insured through employment are not likely to care’s cost has grown on average about 2.5 percentage know what their insurance costs, and even if they do, points per year faster than the GDP, and therefore they have little choice or incentive to act on the infor- consumed an ever-increasing share of the GDP. mation. Effi cient alternatives may exist, but people Businesses have responded by shifting more of the cost usually have no opportunity to choose them and keep to their employees, in the form of higher shares of pre- the savings. Effi cient delivery systems will not be miums and reduced coverage, including the introduc- developed unless there is a market for them – that is, tion of high deductibles. In recent months, the states a demand for effi ciency. Th ere is virtually no demand have tried to play a role – again, with structures that for effi ciency today. If all or most people had a reason often include higher deductibles to minimize costs. to choose effi cient systems, care providers, to succeed, However, the new “reform” plans – the Massachusetts would need to create and off er them. plan, Governor Arnold Schwarzenegger’s plan, the As explained in detail in Chapter One and Appendix proposal of the Health Coalition for the Uninsured – B, the incentives in today’s dominant fee-for-service are purely fi n a n c i n g plans designed to gather together system are often perverse. Th is model punishes available resources and rearrange them to cover economizing behavior.71 Senator Charles Grassley, everyone.70 Because of the resource constraints on the then Chairman of the Senate Finance Committee, was states, they cannot address the structural incentives quoted in the New York Times as saying, accurately, that drive the delivery system and its infl ationary that “Medicare now pays the same amount regardless nature. Th ese plans will not be sustainable over of quality.” He added that Medicare “rewards poor time unless the growth rate of health expenditures is quality” by paying doctors to treat complications brought much closer to that of the GDP. caused by their own mistakes.72 Fee-for-service also Achieving that goal will require a fundamentally discourages teamwork, because it pays separately for reformed delivery system – one that takes advantage the actions of individual members of the care team. of modern management tools, allocates resources Health-care systems could produce better care at less effi ciently, uses information technology productively, cost if provider incentives were aligned with the needs and aligns the incentives of providers with the needs and wants of the American people for high-quality and wants of consumers and patients for high- aff ordable care. In the broadest sense, every member quality aff ordable care. Only market forces, with the of a health-care team must have an incentive to develop

a Geography, especially in rural areas, can be a signifi cant barrier. However, where rural residents have the reliable purchasing power to buy insur- ance, insurers and providers have sought ways to deliver care.

34 and follow the most-eff ective, evidence-based care pro- integrate these activities into actual care delivery, and cesses. Providers must make comprehensive judgments extend continuous improvements from the larger of the best treatment, rather than piece-by-piece deci- headquarters organizations into their local practices. sions on what items and prices the insurer will approve. Because there are more new clinical trials and studies To bring these broad principles to life, payments could than any single physician could possibly absorb while be set for more-globally-defi ned “products” – say, the still seeing patients, successful delivery systems in a complete treatment of a particular illness or injury – cost-conscious market would devote some of their rather than for the individual items of care – like one manpower to devising practice guidelines and ensur- pharmaceutical tablet delivered in a hospital.b Salaried ing, with the assistance of information technology, that physicians with signifi cant bonus payments for quality, they are followed. Physicians, like all other workers, patient satisfaction, effi ciency and teamwork might do not enjoy being monitored, but performance be more in keeping with this goal. An insurance plan measurement is used in virtually every other industry with prepaid capitation, and ideally with risk adjust- because it works: it yields better performance. ment as well, would be one way of achieving this goal, Integration and Coordination of Care. American but there may be others – including even some as yet medicine is a fragmented non-system. Institutions unknown restructuring of the fee-for-service model, and settings in which patients receive care are like perhaps driven by digital technology.c separate “silos,” with poor communication among Confl icts of interest – the quintessential misalign- them. Doctors practicing in community hospitals are ment of the interests of patients and providers – are mostly free agents with interests that confl ict with widespread in treatment and procurement decisions in each other and with the hospitals. An important and medicine.73 An important part of incentives alignment remarkable feature of the uncoordinated FFS system must be rigorous policies to minimize such confl icts is that, for the most part, it does not keep records in of interest. Physicians who decide which item of usable form. As a result, Americans are receiving just equipment or technology or which pharmaceutical to over half of recommended care, and errors of omission use should not have fi nancial links with suppliers. As are widespread.75 George Bernard Shaw observed 101 years ago, the To remedy these failings, successful health systems contemporary fee-for-service model – tellingly, essen- must continually evaluate and redesign work processes tially unchanged over those 101 years – is inherently to improve effi ciency and take full advantage of IT. a confl ict of interest.d,74 Alternative fi nancing systems Providers must keep continuous, comprehensive, can reduce confl icts of interest and produce strong longitudinal medical records, analyze them, and feed incentives for quality improvement, error avoidance, the results back into practice improvement. Th ey disease prevention, and effi cient treatment choices. must follow patients over time and learn what works In any case, incentives alignment, engaging both and what does not. Th ey must deploy and use health patients and providers, is a necessary condition for an information technology to create caregiver support effi cient delivery system. tools such as shared comprehensive electronic health records, guidelines, prompts, and reminders, to moni- Continuous Improvement and the Learning Organiza- tor performance and to take corrective action, where tion. Th e concepts of continuous improvement and a appropriate, to assure optimal care.76 Doctors can be learning environment should become core competen- better informed about each patient, electronic pre- cies of every delivery organization. Providers should scribing can reduce errors, and secure doctor-patient b Th e Dutch, for example, pay hospitals for complete inpatient cases including all associated physician services. Th e British National Health Service is moving in the same direction. c Risk adjustment, sometimes called risk equalization, is a process that measures relative expected health expenditures in diff erent enrolled groups, and compensates those health plans that enrolled a more costly group at the expense of those that enrolled a less costly group. All individuals, regardless of their medical condition, see and pay the same premium; premium revenue is transferred behind the scenes from insurers who enroll pro- portionately fewer risky patients to insurers who cover relatively more of the risky patients. d Th e Doctor’s Dilemma, written in 1906. “Th at any sane nation, having observed that you could provide for the supply of bread by giving bakers a pecuniary interest in baking for you, should go on to give a surgeon a pecuniary interest in cutting off your leg, is enough to make one despair of po- litical humanity. But that is precisely what we have done. And the more appalling the mutilation, the more the mutilator is paid.”

35 communication by email or mobile phones can lead keep them profi cient and well-informed. Physicians to better-prepared doctor visits and reduce the need must be committed to the delivery model used by their for visits as well. Th e integrated-delivery systems are systems; no health plan can succeed or even survive far ahead of the traditional FFS sector in deploying in a competitive environment if its providers are not IT.77 It is apparent that the benefi ts of IT – reducing dedicated to its objectives and methods. Th at objec- the need for hospital days, doctor visits and diagnostic tive could be met in at least some plans with salaried tests – are not in the interest of individual FFS physicians with signifi cant bonus payments for quality, providers.78 patient satisfaction, effi ciency and teamwork. Trained non-physician personnel can perform additional ser- Delivery systems that are responsive to cost-conscious vices, reserving physicians for where they are needed. consumers would integrate and coordinate the contin- Equipment can be deployed in appropriate quantities uum of care – at home, the doctor’s offi ce, the hospital for effi ciency and economies of scale. and the outpatient setting – to improve both quality and effi ciency. Costs can be reduced when doctors Supply-Chain Management. Hospitals compete for and hospitals are part of the same team with common doctors who bring them patients. One way they do so interests. Care should be delivered in the least-costly is to cater to each doctor’s preferences for particular appropriate settings, considering total system costs, types of equipment. Accordingly, hospitals often use not just costs and revenues associated with one setting.3 several diff erent types of devices from diff erent sup- Quality can be increased with smooth transitions and pliers for the same purpose, thus diluting their pur- hand-off s between care settings, so that, for example, chasing power and adding to cost, complexity and the outpatient providers are well-informed on inpatient chance of error. Effi ciency and quality would improve care (and vice versa). Automated tracking should fol- if the doctors in each specialty in each institution low actual practice versus the standard, with a message would collectively study the available products and sent to the appropriate provider to inquire about any recommend the product lines that off er the most value deviations. for money, so that the hospital could concentrate its purchasing power on the selected suppliers.f Match Resources Used to the Needs of the Population Served. Because the traditional model involves sepa- Market Reorganization to Streamline Administra- rate payments for each item after the fact, it cannot tion and Customer Service. Th e administration of our use a “budget” to plan or to allocate resources. It does employment-based health insurance is unnecessarily not practice some of the elementary principles of good costly. Th e typical large health-insurance company management, such as matching the resources supplied spends between 15 percent and 20 percent of revenue to the needs of the population served, or the services on administrative expenses (and profi ts). Billing and produced. Successful systems could reduce costs by insurance-related costs in California for acute health deploying physicians in the numbers and types needed care, including doctors and hospitals, have recently to provide high-quality care to their enrolled popula- been estimated at 19.7 percent to 21.8 percent of tions. Specialty imbalances contribute to the large spending.80 Th e optimum administrative expense is ineffi ciencies often observed in American medicine. far from zero, as noted above in the context of Medi- Too many surgeons can lead to too much surgery, and care, but fee-for-service payment generates unnecessary to surgery done by non-profi cient surgeons.79 expense. Health-care quality and decision-making would improve if systems utilized per-capita prepay- Cost-conscious systems would select and train physi- ment, or set prices for complete inpatient cases rather cians and other health professionals for quality and than individual services. Such streamlining would also willingness to work in teams, establishing programs to drastically reduce administrative costs.

e Integrated delivery systems now engage in such planning better than disaggregated providers. Other providers, for example multi-specialty group practices, hospital-medical staff organizations, physician-hospital organizations, insurer partnerships with provider networks, individual practice as- sociations, etc., might plan eff ectively if given appropriate tools and incentives. f See also the above remarks about confl icts of interest.

36 Universal health insurance based on competition could major improvements of organization of health-care reduce administrative expenses even further. A good delivery systems that would result from market-driven example is provided by the experience of the health alignment of incentives. insurance program of the California Public Employees’ Retirement System (CalPERS), which brokers cover- Reorganize Around Medical Conditions, Not age for about 1.2 million California state and local Medical Specialties government employees, retirees and dependents. Once Reorganize for Chronic-Care Management. As was a year, Kaiser Permanente signs one contract with documented above, chronic conditions are now a ma- CalPERS to cover over 400,000 persons. CalPERS’s jor – perhaps the major – driver of health-care costs. administrative expenses are less than one percent of And yet, today’s health-care and payment systems are the premium. Similarly, universal health insurance, still designed to manage and pay for acute episodes, working through a central broker such as CalPERS not chronic conditions. Insurance plan designs, and or the FEHBP, would eliminate underwriting and the thinking that goes into them, are too close to the contracting expense for individuals and fi rms. All casualty-insurance model, rather than encouraging the benefi ciaries would pay the same price for the same maintenance of health. coverage, regardless of health status. Biased risk se- lection can be avoided by risk equalization for whole Th e New York Times reported in a series of articles on populations, computerized behind the scenes; insurers diabetes that “Insurers, for example, will often refuse already accept and practice risk equalization in some to pay $150 for a diabetic to see a podiatrist, who can existing health-insurance systems. Health insurance help prevent foot ailments associated with the disease. contracts would be standardized, reducing cost and red Nearly all of them, though, cover amputations, which tape. Employers could eliminate the health insurance typically cost more than $30,000.”81 Such a system component of their benefi ts management departments is an anachronism. Fee-for-service generally pays for (except to the extent that they chose to provide infor- episodes such as doctor visits or procedures. Th ere is mation and support to their employees), while CEOs no incentive to provide on-going preventive and chronic would be freed to spend many hours on their core busi- care such as counseling sessions.g,82 nesses rather than on health-insurance costs. Appropriately trained non-physician personnel such as Health plans would face much greater competition dieticians can perform important chronic-care services, in a transparent market serving cost-conscious indi- reserving physicians for where they are needed. Better vidual customers, which would give them an incentive designed payment systems – perhaps insurers making to squeeze out unproductive administrative expenses fi xed periodic payments to hospitals and their medical and reduce profi t margins to competitive levels. Th us, staff s for comprehensive care of patients with chronic the consolidation of health-insurance purchasing into a conditions – would encourage chronic disease manage- universal competitive system with a central broker can ment programs, including monitoring patients; adjust- reasonably be expected to yield substantial administra- ing medications as timely and appropriate; educat- tive savings, while also creating ongoing competition ing patients on how to do their part to manage their among delivery systems. diseases; and removing fi nancial barriers to patients’ obtaining necessary care. Such incentives would not Quality and Effectiveness necessarily require comprehensive integrated delivery systems. Risk-adjusted premiums would ensure that Th e incentives in the current health-care fi nancing sys- delivery systems that attract and care for patients with tem drive health providers away from both quality and chronic conditions are paid appropriately. aff ordability. To give a sense of what could be achieved in both of these dimensions, following are some of the

g As was noted in Chapter One, some hospitals have found it cheaper to off er low-income persons with acute diseases resulting from poorly managed chronic conditions free chronic disease management on an outpatient basis, because of the savings in reduced uncompensated emergency care.

37 Health Promotion and Disease Prevention. Chronic for regional price diff erences) in the last six months of disease often arises from the failure to engage in good life, and found substantial regional variation, with the health behaviors – such as obesity-prevention, exer- high-spending regions spending 60 percent more per cise, diabetes-control, smoking-cessation, and appro- patient than the low-spending regions. Th ey reported, priate prevention methods such as cancer screening.83 “Neither quality of care nor access to care appear to Costs could be reduced in the long run by systems that be better for Medicare enrollees in higher-spending change patient behavior and emphasize primary care, regions… Medicare enrollees in higher-spending disease prevention, and early detection and treatment. regions receive more care than those in lower-spending One of the negative consequences of fee-for-service is regions but do not have better health outcomes or that it generates the greatest income opportunities for satisfaction with care.”86 doctors in specialties such as oncology and radiology, A recent RAND Health study found that “Th e exist- and poor pay for primary care – leading progressively ing health care system generally classifi es patients by fewer graduates of American medical schools to seek disease and setting of care, but this method is becoming careers in primary care. Primary-care physicians pro- less eff ective because it works poorly for the increas- vide coordination and continuity of care, health promo- ing number of elderly individuals who have multiple tion counseling to patients, and a medical home for care diseases and need care in more than one setting…End- based on continuous healing relationships. Success- of-life care should be organized according to the kinds ful health-care delivery systems must educate patients of services that groups of people need, rather than by to avoid lower back and other injuries, stop smoking, disease diagnosis or where patients receive care…Pal- and pursue proper diet and exercise. Our unhealthy liative care and conventional medical treatment should lifestyles begin far before the reach of the health-care be thoroughly integrated rather than viewed as sepa- delivery system; public-health measures, school-based rate entities.”87 Again, these recommendations support programs, work-site programs and more are needed. greater continuity and integration. Integration of end- But it could help a great deal if the health-care delivery of-life care, including integrated billing, would reduce system, with all its resources in intelligent, well-educat- the incentive to over-utilize ultimately fruitless special- ed personnel, technology and money, fi rmly pursued ist and intensive-care services, and encourage more- improving people’s health.84 humane alternatives. Regional Centers for Complex Care. Far too many complex medical procedures are performed in facilities Core Competencies That Are Not Encouraged by that work in ineffi cient and dangerously low volumes.85 the Traditional Model Are Urgently Needed Fee-for-service payment rewards such choices. Both Th e modern fi rm, especially in the service sector, treats economy and quality require concentrating complex capital investment in information technology as a criti- care in regional centers of excellence. Effi cient incen- cal core competence. Rather than focusing solely on tives would drive delivery systems to create their own automation of individual client records, they use those centers or subcontract the work to centers outside their front-line data in every aspect of their work. A health- systems, based on rational “make-buy” calculations. care system reorganized along the lines of medical Th us, the effi ciencies that are attainable in chronic care conditions, as suggested above, would naturally pursue can also be achieved at the other stages of the contin- numerous improvements, some (but by no means all) uum of care (procedures and catastrophic care), given of which are explained below. sound incentives. Eff ectiveness. John E. Wennberg and his Dartmouth End-of-Life Care. Although the share of health colleagues have documented very wide practice varia- spending on patients in their last year of life has often tions among doctors in diff erent parts of the country, been exaggerated, it is still signifi cant, accounting for and even variations among doctors in the same com- about 30 percent of Medicare, while Medicare accounts munity that cannot be explained by variations in medi- for about 17 percent of national health expenditures. cal need. Wennberg ascribes much of this variation Elliott Fisher and his Dartmouth colleagues recently to medical uncertainty, to supply-side factors (such as examined Medicare spending per benefi ciary (adjusted too many surgeons), and to idiosyncrasies in practice

38 style.88 Several eff orts are underway to identify the Genomics off ers exciting opportunities for better care best standards for care delivery, under the headings – and also large challenges to the health-care system. of “evidence-based medicine” and “guideline develop- Th ere are hundreds of genetic tests now available, ment.” Th ese processes could speed the transfer of some quite costly. Genomics off ers opportunities to scientifi c discovery into medical practice. diagnose people at high risk of disease and to develop targeted therapies. Eff ective use of these resources will It is extraordinarily diffi cult to manage the huge fl ow require systematic approaches, including evaluation of of medical information. Over 10,000 randomized who should be tested, and what prevention strategies trials are published each year. Th is massive literature and therapies they should be off ered. Legislation to fa- exceeds the grasp of solo or small-group practitioners. cilitate market entry by companies that want to create To provide aff ordable, quality care to cost-conscious and sell generic substitutes of very costly biologics once consumers, this information must be translated into the patents held by the original developers have expired up-to-date science-based best-practice guidelines by will also be needed. physicians with a serious interest in economical prac- tice, and made conveniently available to doctors. A Th ere has been considerable work to measure the consortium of medical groups in Minnesota called the quality of care and service in health plans and medical Institute for Clinical Systems Improvement, and the groups. Th e National Committee for Quality As- Kaiser Permanente Care Management Institute, are surance, a non-profi t organization dedicated to this pursuing this task.89 Th e Veterans Health Adminis- purpose, undertakes a well-tested survey and publishes tration has a similar program called the Quality En- ratings of health plans on quality of service and ac- hancement Research Initiative.90 Such programs, com- cess; performance of preventive services such as cancer bined with monitoring and feedback, should greatly screening and immunizations; and helping people to reduce the medical uncertainty that contributes to the stay healthy, get better, and live with chronic illness. very wide variations in medical practice. Such information is now on the Internet.91 If it is con- veniently available to people choosing health plans, it Getting practice organizations to implement these will give those plans a powerful incentive to improve. guidelines will be a major challenge. Th ough experi- ence suggests that such guidelines are best applied by Access to Quality Coverage multi-specialty group practices with organizational missions of effi cient high-quality care, other small We need humane coverage – coverage that is com- groups of practitioners who choose to focus on a niche prehensive, protecting everyone from severe fi nancial service could have similar goals. hardship related to medical expenses, and also secure, so that people do not lose their coverage when they Building on this best-practice research, the health- lose their spouses or change their jobs, divorce, become care system must move away from “fl at-of-the-curve” sick, or retire before age 65. People need the right to medicine – that is, practices whose marginal health stay with their preferred delivery system so long as benefi t is very small and uncertain relative to the cost. they do not move out of its service area. Insecure cov- It must evaluate new technologies and use them only erage is a major problem in our health-care economy where evidence supports that they are benefi cial to today, because many people are just a layoff away from patients. Such evaluation involves technology assess- economic insecurity and uncovered health-care costs. ment, including cost-eff ectiveness or value for money in actual practice over time, and not just in controlled We also need very broad risk pools, because some trials. Fair regulators must create a legal framework treatments that society seems unwilling to deny to under which health insurers can off er policies that do those who need them have become extremely costly. not cover some technologies because of cost, to make Risk-spreading among competing delivery systems can insurance more aff ordable. Doing so will be exceed- be accomplished by risk adjustment and reinsurance ingly diffi cult, but such restrictions may be necessary for very-high-cost cases. to achieve long-term sustainability. At the same time, we must not shut down valuable life-saving innovation. Finally, we need a more vigorous and eff ective an- ti-trust policy including breaking up any regional

39 provider monopolies created by mergers whose main Could such restructuring solve the problem of unsus- purpose is to achieve market power.h tainable cost growth? Th ere is no guarantee, just as there is no guarantee with any other system. But it Conclusion is eminently reasonable to conclude, at least, that the system reforms outlined here could reduce the level Th ese attributes of existing successful health-care sys- of health expenditures. Given the range of premium tems, taken together, would radically reshape health- costs among insurance plans using diff erent delivery care delivery, yielding both higher quality and lower systems at this time, people who would move from the cost. Yet each of these expectations is reasonable on its most- to the least-expensive plans would cut their costs face. None is more than what is already expected of a by as much as half.i As more-costly plans respond to well-run, world-class competitive company in any other competition, savings would accrue across the board. sector of the economy. Th e motivation of competition would also appear to Th is transformation of health-care practices cannot be be our best chance to counterbalance the expenditure- imposed by the government top down, or even by em- increasing eff ects of expanding technology and the ployers. It would be very diffi cult to defi ne such a sys- proliferation of chronic conditions, and thereby reduce tem in legislation, and no one knows exactly what the the rate of growth of costs as well – facilitating quality best system for health-care delivery is, or what it will and sustainable coverage for all. become as health technology continues to evolve. But Th ere remains the task of fi nding the policy steps that the market forces of informed cost-conscious consumer can implement such a sweeping transformation. Th e choice can drive a successful transformation. Better next chapter will address that task. systems can emerge only by success in a competitive market.

h In its important report, Crossing the Quality Chasm: a New Health System for the 21st Century (Washington, DC: National Academy Press, 2001), the IOM put forward a shorter list of ideal health-system attributes that is well worth considering carefully. Th e paragraph headings of their list were: 1. Care based on continuous healing relationships. 2. Customization based on patient needs and values. 3. Th e patient as the source of control. 4. Shared knowledge and the free fl ow of information. 5. Evidence-based decision making. 6. Safety as a system property. 7. Th e need for transpar- ency. 8. Anticipation of patient needs. 9. Continuous decrease in waste. 10. Cooperation among clinicians. Th e ideas are completely compatible with the views expressed above. i Based very roughly on the diff erences between the most and least expensive premiums charged where employees do have responsible choices among competing plans.

40 Chapter Four: Essentials of Market-Based Universal Health Insurance with Consumer Choice of Health Plan

So if the single-payer or consumer-directed approaches Merely shifting the nominal responsibility for the will not solve the problems of high levels and growth of cost from one party to another (say, from business to expenditure, not to mention the uninsured, poor qual- government), when the cost is growing faster than the ity, and poor disease management, what will?a Th ere capacity of the economy as a whole to pay it, obviously are no easy, simple solutions. will not suffi ce. But as the earlier chapters of this report have suggested, a systemic restructuring of the And there are no guarantees. Th e nation cannot simply health-insurance system, with sharpened incentives for decree a reimbursement reduction for health-care pro- cost-conscious behavior on the parts of both individuals viders: doing so would discourage the supply of health and providers, could reduce both the level and the rate care. As has been the case in stopgap reimbursement of growth of costs while improving quality. cuts in the federal Medicare program, doctors and hos- pitals would respond by performing more individual Competition motivates innovation and effi ciency. For services to maintain their total billing amounts. Like- virtually the entire non-health-care economy, competi- wise, the nation cannot decree an arbitrary limit to the tive pressures have increased quality and tempered volume of medical services provided; that could prevent prices in unpredictable ways. Consumer choices have the delivery of needed services. An arbitrary halt to signaled price standards and preferred product and the development of medical technology would inhibit service attributes to the marketplace, and suppliers innovations that could benefi t people enormously, and have improved their processes and methods to meet would prevent the discovery of cost-reducing, as well as and then to surpass those standards, thereby setting cost-increasing, treatments and therapies. And there new ones. Even given the unique nature of health care, are no clear models from overseas. Virtually all the in- some elements of competition provide the best hope for dustrialized countries are facing similar unsustainable a more cost-effi cient health-care system. expenditure growth rates, though from lower levels of What would a competitive system do? Clearly, we spending than ours measured as percentages of GDP. need a fundamental change that would give almost Th us, there likely is no strategy that would yield a everyone a serious personal interest in seeking and precisely measurable, accurately predictable amount of choosing a quality, economical health-care delivery health-care cost savings. system. Th e earlier discussion of CDHPs expressed doubt that consumers could drive health-care effi ciency However, there are feasible changes that might make a by shopping for lower prices for individual treatments large diff erence and, in the long run, move the system and therapies for serious illnesses. However, consum- in the right direction. Th e heart of the solution is ers could have meaningful infl uence on the health-care fi n a n c i n g reforms to create competition to serve cost- market by shopping in a more deliberate fashion for conscious buyers, which will build incentives for pro- cost-effi cient health-care plans. viders to develop and run high-quality, but aff ordable, health-care delivery systems. Such systems exist. Th e University of California off ers employees a range of choices including both FFS and Th e only way to achieve sustainable, quality health care group practices, with a fi xed-dollar contribution set is to obtain from the health industry the same level at the risk-adjusted premium of the low-priced plan, of process and effi ciency improvement that we have which, like all plans, must meet quality and coverage come to expect from other sectors of our economy. a See the discussion of the single-payer and CDHP options in Chapter Two.

41 standards set by the University. Th e state of Wisconsin their negative consequences, as documented earlier. has a similar system for its employees, and the Neth- However, in this section, we examine an alternative that erlands has recently enacted its own national reform eliminates the current system’s distortions – by off ering along these lines.92 In such arrangements, every con- consumers choices of diff erent plans, and giving each sumer can benefi t fi nancially from choosing a lower- consumer a fi xed-dollar payment to purchase the plan priced plan, and the low-priced plan can protect its of his or her choice. In this system, consumers have an market share by maintaining or widening the gap be- incentive to be cost-conscious. tween its premium and those of its competitors. Em- To attain such a system, CED recommends two broad ployees make their choices at an annual enrollment at policy steps: which the prices are displayed side-by-side, and switch- ing plans is made easy. Under these conditions, 81 • Create competitive insurance markets and exchang- percent of the employees of the University have chosen es; and the lower-cost plans (in this case, group-practice-based HMOs), as have 90 percent of the employees of the • Provide universal premium credits fi nanced by state of Wisconsin. Wells Fargo Bank in California has broadly based taxes.* a similar model whose enrollment in low-cost group- Th ese two changes to the fi n a n c i n g system will lead b practice-based HMOs is 78 percent. Th e Federal naturally to a dramatic change in the health-care deliv- Government does something similar for its employees, ery system: and 58 percent of Federal employees in California have chosen the same HMOs off ered to employees of the • Delivery systems and insurance carriers strive for University and Wells Fargo. Th e reform in the Neth- quality and aff ordability. erlands has been in operation for only one year, but in Th e model is based on observation and analysis of the that year has seen a decline in the rate of cost growth. success of employers such as the federal government; Under these systems, cost-conscious employee choice state governments in California, Washington, Wiscon- drives patients to the most-effi cient providers and sin and Minnesota; and the University of California, motivates the others to reduce costs and increase qual- Stanford University, Wells Fargo and Hewlett-Packard ity to maintain their competitive positions. Unfortu- in California. Th ese employers have demonstrated its nately, only a small percentage of employees are in such practicality. models now. As explained earlier, most employers do not off er choices, and many of those that do pay all, Competitive Insurance Markets and or nearly all, of even the highest premiums for their Exchanges employees. Th is apparent generosity gives even gener- Th e Need for a Market Organizer. Th e markets for ally cost-ineffi cient providers a secure market, with no health insurance, or health insurance combined with incentive to improve.c What is needed is for essentially health-care delivery, are unique. Th eir uniqueness does everyone, possibly excepting groups such as the dis- not mean that competition in these markets is impos- abled and the population undergoing long-term care, to sible, but the nature of these markets does mean that receive a regionally based fi xed-dollar payment toward the competitive process needs rules – much as do the his or her insurance premium, accompanied by a menu markets for other insurance products or for securities, of meaningful choices of insurance plans. for example – to yield effi cient and fair outcomes. Th e Many people might doubt that the quality and cost unique attributes of the health-insurance market are: of health care can be driven by consumer choice of a • Risk Selection. When diff erent health insurance health-insurance plan. We believe that such doubt plans compete for the same people, the health risks arises from the distortions in the present markets and

*See Memoranda, pages 84-86. b Again, these are not cheap or bare-bones “plan designs,” but rather comprehensive coverage associated with large multi-specialty physician organi- zations that are committed to economical use of resources. c What little competition exists in the current system has motivated many doctors who prefer the FFS model to form Independent Practice Associa- tions (IPAs) that include management controls and enable them to compete.

42 or expected medical costs may not fall equally on consumer cost-sharing for services that are mostly the diff erent insurers. Biased or “adverse” selec- consumer-preference items. However, aside from tion can lead to spirals of instability in which some plastic surgery and “lifestyle drugs” such as for plans attract worse-than-average risks, forcing baldness or erectile dysfunction, drawing the line those plans to raise premiums, making them even between “necessary care” and “consumer-preference less attractive to good risks who then exit the care” can be diffi cult. plans, leaving even worse risk pools in the plans – • Unusual Complexity. Health insurance contracts until the plans become non-viable. Worse yet, the – their language and the underlying technology possibility of biased selection can create perverse – are extremely complex. Th ere are too many incentives in which the insurers and associated possible future events. Few consumers really providers, for survival, try to avoid enrollment understand their health insurance policies or by sick people, producing the opposite of what a actually read them. Even the “simplifi ed” presen- health insurance system is supposed to be: fi nanc- tations of employee benefi t packages usually take ing care of the sick. Th is perverse incentive can 40 to 50 lines just to describe the services covered cause providers to avoid achieving expertise and or excluded, the limitations, and the co-payments distinction in the care of costly chronic conditions. or coinsurance rates. Medical care is even more In a completely free market, insurers would inspect complex. It generally takes seven or eight years of and underwrite each applicant and reject those post-graduate education and training to be consid- with high expected costs, which is not compatible ered a qualifi ed physician, plus continuing educa- with widespread or universal coverage, and would tion thereafter. Although some people can become be costly and time consuming. suffi ciently informed to contribute to strategic • Moral Hazard. Most employed Americans today choices in particular cases, the vast majority must do not even have a choice of insurer, or if they do rely on the advice of their doctors, which makes have a choice, their employers (and the govern- them less than equal participants in a competitive ment, through the tax code) pay more on their market. behalf if they choose a more-costly health insur- • Information. As discussed in the following chap- ance plan. Th is lack of competition biases choices ter, there is a paucity of reliable, understandable toward more-costly care. Moreover, once people information on the costs and comparative effi cacy are insured, their health-care services are free, or of interventions and technologies. Merely publish- almost free, and people demand services that they ing hospital charges for individual episodes would would not choose if they had to pay their cost – in address only a part of the problem. No matter other words, services that are not worth their cost. how much information is accumulated and dis- So insured people choose more services, often of seminated, and with the exception of a small and limited value, than do people without insurance. highly motivated population, the doctor will know Th is perverse incentive is exacerbated by fee-for- a lot more about a patient’s medical condition than service payment to providers – under which both the patient. Th at is why patients consult doctors, patients and providers have incentives to demand and why the doctor’s incentives are important in and provide services they would not choose if the design of a system. patients had to pay and providers were not paid for each service. Th ere is no perfect answer to this What the Market Organizer Must Do. Because of problem. As explained earlier, high deductibles do these complexities, to establish and enforce rules that little to mitigate this problem, because health maintain fair competition and its effi ciencies for indi- expenditures are highly concentrated on relatively viduals and families as decided by the employer or the few people who will have exceeded their deduct- legislature, health insurance markets must be organized ibles and would not pay for additional services by a neutral third party – an entity with a name such out-of-pocket. Th e most eff ective answers include as “market organizer,” an “exchange,” a “connector,” a incentives for providers to deliver care effi ciently “pooled purchasing arrangement,” a “Health Insur- and not over-sell services of doubtful value, and ance Purchasing Cooperative,” a “Health Market,” a

43 “Health Help Agency,” or a “Sponsor.” For simplic- Each subscriber would notify the exchange of his or ity, let us call such an entity an “exchange.” Th ere are her choice of health plan, and the exchange would ample precedents for such a market organizer in the notify the plan, so that the plan had no opportunity federal and state agencies for transactions in securities to screen applicants. Th is is normal in employment (as well as in the quasi-regulatory functions performed settings, but unfortunately is not the case in Medicare by the private fi nancial exchanges themselves) and and Medicaid. other forms of insurance. Every eligible person would be covered, and eligibility Th e exchange would be the single point of entry for all would be guaranteed.e No exclusions would be allowed consumers to purchase health insurance; buyers and for preexisting conditions. Th e same premium would sellers would execute transactions through the ex- be charged for the same coverage regardless of health change according to established rules. Th ere could be status. Coverage would be continuous. Persons one national exchange managing insurance choices in choosing a plan priced above the low-priced plan would all regions, or each region could have its own exchange pay the premium diff erence with their own money (as (more discussion of that choice is provided below). Ex- explained in more detail below). changes would pool large numbers of individual risks To make demand price elastic, and therefore to make and spread administrative overhead so that small-busi- competition eff ective in motivating improvements in ness workforces could aff ord insurance. An exchange effi ciency and quality: for health insurance, like a securities exchange, could perform much of its service in digital electronic form. • Th e exchange must enforce public quality-related information-reporting requirements, and distrib- Th e exchange would off er choices of alternative health ute information about plans, including their qual- insurers and providers, who would be free to use al- ity, coverage, performance, and price, in a conve- ternative delivery system models. It would be essential nient side-by-side comparison so that people can that wide-access PPO plans be available, so that every- switch plans to save money if they so choose; one who wanted to continue with such coverage and with his or her own physician could do so; every con- • Th e exchange must standardize the fi ne-print sumer could “keep what he or she had.” Th e exchange contract language and reasonably standardize plan would either select participating plans for economy designs, so that consumers can make meaningful and satisfaction of consumer choices, or, if there is to price comparisons at a reasonable search and study be free entry and a relatively large number of plans, cost, and switch easily and with confi dence at the organize the information for consumers with “plan- annual enrollment. Coverage contracts must be chooser” software to make it easy for them to fi nd the standardized to focus comparison on price and plans that best suit them.d quality, not features, to counter market segmenta- tion and the use of the coverage contract to select Th e exchanges would facilitate individual choices risks;f and and switching among plans during periodic open-en- rollment periods. To provide universal coverage, the • Choice must be at the individual or household exchange would need to engage in outreach services level, not the employment group level, so that each such as advertising, and placing personnel and comput- person is free to switch plans regardless of the ers in public libraries and other locations where people preferences of co-workers. – especially low-income people – could enroll easily, including online. Importantly, to prevent the ill eff ects of risk selec- tion, the exchange must risk-adjust premiums. Th e d Th is approach has been attempted in Medicare Part D, but the number of plans was so large that it required considerable eff ort to create a system for the elderly to study and compare the alternatives. e A major issue in creating any system of universal health insurance will be to defi ne who are eligible to be covered through it. In the United States, the most salient issue is likely to be coverage for undocumented aliens. f Th is standardization does not mean identical contracts, but it does mean that fi ne print exclusions need to be the same, that diff erences in some key coverages (including mental health and fertility treatments) be minimized to avoid adverse selection, and that variations in front-end cost sharing must be reduced to the point that most people can understand the choices.

44 exchange would process and analyze information on and varies widely by region. Regional exchanges would each enrollee to estimate the cost of that person’s cov- study market conditions in their regions, prepare “Beige ered medical services. Estimates in the near future Books” analyzing the regional performance of health will most likely be based on prescription drug use, care, and report to the national exchange. Th e regional which is recorded in electronic form for most people exchanges could work with local non-profi t provider- and which indicates the presence of chronic conditions, sponsored plans to help them enter the market and as well as the person’s age, sex and location. However, increase competition. Th e national exchange could research continues and continued improvement can be assign auditing functions to regional exchanges using expected, especially with public-policy support. Th ese uniform national standards. Th e regional exchanges estimates would then be pooled to produce a rela- could represent the system as a whole to people in their tive risk score for each plan’s enrollees. Th e exchange regions and also represent their regions to the national would then transfer some of the premium revenue exchange. In any case, detailed knowledge of diff erent to compensate those insurers that enroll the greatest localities would be needed somewhere in the system. numbers of relatively poor risks, from the revenues of And a Washington-based centralized system might be those that enroll more relatively good risks. Th e prices less sensitive to local conditions and less interested in that consumers see and pay would be the prices that working with small local provider-sponsored health a plan would ultimately receive if it had enrolled an plans. average population of risks. Th e adjustment would be Th e system could succeed in either a centralized or a a behind-the-scenes computerized process, invisible decentralized model. Legislators or the exchange sys- to consumers. It would eliminate all need for under- tem would need to study the issue and make a decision. writing individual people.g Insurers already accept risk adjustment in existing systems similar to this proposal. In either case, the boundaries of regions for adminis- Risk adjustment would maintain incentives for plans trative purposes should not determine the service areas to enroll and care for sick people, not to avoid them, of health plans. Rather, health plans should establish and avoid the instability caused by spirals of adverse the boundaries of their own service areas. For a suc- selection. cessful example, the Wisconsin Department of Em- ployee Trust Funds, which runs the State Employee Next, should there be one national exchange, or should Group Health Insurance program, invites bids from there be separate regional exchanges? (“Regions” could qualifying health plans for each county. A health plan be market areas such as Southern, Central, and North- could bid on all 72 Wisconsin counties, or only one ern California; upstate and downstate New York and county, or any combination in between. In essence, Illinois; etc.) Should operations – including contract- each health plan defi nes its own region, which ensures ing, enrollment, publication of information on quality that plans have what they believe are strong networks and patient satisfaction, and analysis and reporting on of providers. Employer contributions are then keyed to local market conditions – be decentralized to regional the low-priced plans in each county.93 offi ces? On the one hand, a single central operation in Washington would be simpler and cheaper, especially Th e competitive insurance market that would evolve for plans entering new markets. One level of approval from these policy innovations would be based on price would admit plans to markets anywhere in the United competition, but the price in question is the annual pre- States. Th e federal Offi ce of Personnel Management mium for comprehensive health-care services, not the (OPM) has managed the FEHBP centrally and suc- price of each individual service. Th e annual premium, cessfully for 47 years, at times managing relationships including any copayments and deductibles, represents with hundreds of diff erent health plans. the plan’s total annual cost per person. It gives the subscriber an incentive to choose the health plan that Alternatively, decentralization to regional exchanges provides the best combination of quality and cost. would recognize that health care is delivered locally

g Risk equalization might also include a reinsurance mechanism for very-high-cost cases, designed so as not to weaken the incentives of health plans to prevent the onset of high-cost illnesses or to manage the cases eff ectively.

45 People can understand and respond to such a choice chooses to buy a more-expensive option, he or she must eff ectively, during the annual enrollment when they pay the diff erence, which creates a powerful incentive have information, a clearly defi ned menu of alterna- for people to choose effi cient systems – that is, systems tives, and the time for consideration.94 that they believe off er the best value for their money. Experience shows that more-cost-effi cient systems do Such a competitive insurance market can obtain maxi- very well in such competitive, cost-conscious environ- mum value for money for consumers and taxpayers, ments. Providers would then have a corresponding using fair rules derived from rational microeconomic incentive to create and join effi cient systems. principles, and from experience. Th ose health plans with the best combination of quality, low cost, and With a credit that was signifi cantly lower than the patient satisfaction succeed and have the most sub- price of the low-priced plan, many people would choose scribers. Success is decided by the judgment of in- not to pay the diff erence to enroll. In 2007, only 82 formed, cost-conscious consumers. Th e rules must not percent of workers off ered health insurance by their reward health plans for selecting good risks, avoiding employers actually accepted the off er.96 A premium sick people, refusing costs, or otherwise defeating the support payment of 100 percent of the low-priced goals of effi cient competition.95 plan provides a logical incentive for full participation without complex mandates or other enforcement, and Th us, an exchange-based system would provide every without costly means-testing. Funds for these pay- individual with a menu of choices of health plans that ments should come from broadly based tax revenues meet clear standards for coverage and value. Every raised through, for example, a payroll, value-added or individual could change plans during regular open environmental tax.h Employers are not in this picture, seasons to seek better quality and value for money, and other than, should they so choose, helping their would be guaranteed coverage by the plan of his or her employees to make their choices (and possibly, depend- choice. Prices to individuals would be independent ing on the program design, collecting employee pay- of pre-existing conditions; and insurers who covered ments and forwarding them to the exchanges).i disproportionately high-risk populations would be compensated, and would not suff er from adverse selec- Funding through a broad-based tax would enable tion. Th e health-insurance exchange would be half of enormous simplifi cation. Th ere would be no question the foundation of a working, competitive market for whether a particular individual qualifi ed for coverage. health insurance. Because everyone in the society would participate in the broad-based tax, everyone would have paid, and Universal Premium Credits would be eligible. Payment of the tax, whatever its form, would meet the standards of personal responsi- Th e exchange itself would deliver the second major bility that are appropriate for coverage. Th ere would be building block of eff ective competition. Every eligible no need to enforce any individual mandate to purchase person would receive a credit, which would act as a pre- coverage. Such enforcement could involve signifi cant mium contribution toward purchase of the plan of his or additional complexity under the individual income tax, her choice, and also a guarantee of ability to purchase or through some new freestanding administrative insurance from that plan. Th e payment should equal apparatus. Th ere would be no need to collect premi- or approximate the price of the lowest-priced plan ums for the low-priced plan. Should some individual that serves the enrollee’s area and meets comprehen- fail to enroll in a plan at the inauguration of the system sive standards. As already is the case for the state of or at subsequent fi rst eligibility, that person would Wisconsin, the University of California and the Federal already have paid for coverage; the only question would Employees Health Benefi ts plans, only quality plans be that person’s choice of plan.j with broad coverage may compete. If an individual

h Th is question is discussed in more detail below. Another revenue source would be the elimination of the current income-tax exclusion for employer-paid health-insurance premiums. i Employers might choose to continue dental insurance and coverage for other services not covered by the universal health insurance program, but probably without the benefi t of tax subsidies.

46 Health-Care Financing and Delivery At this time, the health-care institutions that appear Systems Pursue Quality and Affordability most to embody the attributes of effi ciency include the various integrated delivery systems based on multi- Together, establishing a health-insurance exchange specialty group practices, and network models link- and the availability of fi xed-dollar contributions would ing multi-specialty group practices .l Experience in lead naturally to a competitive marketplace for health- California, Wisconsin, Minnesota, Washington and care providers and insurance plans. Every consumer Massachusetts, and in the FEHBP, including all of would have health insurance through the fi xed-dollar these models, shows that relatively effi cient organized premium credits, but more importantly would have an delivery systems do exist, their performance can be incentive to choose the plan that he or she believed to measured, they can and do improve, and they have the be the best combination of quality and value for money, potential to deliver better-quality and more-cost-effi - because he or she would pay any cost beyond the fi xed- cient care.97 dollar credit with after-tax dollars. Consumers could change plans freely at annual open seasons if they were As was noted above, there is an existing model of what dissatisfi ed. Th erefore, to attract and to keep custom- the whole market for health-care fi nancing and deliv- ers, plans would have to pursue effi ciency and quality. ery could be, in the choices presented to a University Th is system might be called “market-based universal of California or a Wisconsin state employee: a menu health insurance.” of quality competing health plans, with information on quality and patient satisfaction, and a responsible Th is design would focus competition on value for fi nancial choice – that is, the employer pays the price of money in the informed best judgment of consumers, the low-priced plan, and the employees who want plans and not in any way pick winners and losers in advance. that cost more pay the diff erence. Th e competitive market would do that, over time. Th e system should encourage diff ering delivery modes to A similar suggestion by some prominent elected foster competition and innovation.k It should in- offi cials from both political parties is to use the clude plans with fee-for-service organization and wide FEHBP as a model for everyone. Th e FEHBP off ers choices of physicians, so that those who currently use employees and retirees a wide range of choices and a such systems and want to continue to do so can keep semi-fi xed-dollar employer contribution. Th e FEHBP what they know and prefer. In the end, some existing is a large and nationwide system and serves as another models might succeed in the competitive marketplace, good metaphor, although it should correct several sig- or the winners might be entirely new, as-yet-unimag- nifi cant design defi ciencies, either for serving its exist- ined models. One thing would be certain: the outcome ing population, or as a national model.m would be better than today because the incentives and opportunities for consumers to choose quality, aff ord- able care would be enormously increased.

j Note that an individual who failed to enroll in a timely way, and subsequently, upon needing care, chose to participate in a plan more expensive than the low-priced plan, would rightly be responsible for the incremental cost of that more-expensive plan since the last open enrollment. k One valid concern about such a model is that it could encourage a “race to the bottom,” under which insurance carriers would attempt to lower prices by reducing value rather than increasing effi ciency. Such a development must be prevented, and it would be a part of the role of the exchange to do so. (In the FEHBP, the federal Offi ce of Personnel Management (OPM) already plays this role.) One obvious way for insurers to try to cut prices would be to introduce and increase deductibles. To prevent such manipulation, we believe that insurers that off er high-deductible health plans must be required to fund, out of their premium revenue, health savings accounts in the amount of the deductibles. Advocates of HDHPs with HSAs in the current employer setting have argued that they are cost-eff ective to the employer, even with employer contributions to HSAs. If that is true, then a requirement for insurers to fund HSAs should not prove an unfair handicap to the HDHP plan design. FEHBP is discussed further in the follow- ing chapter. l See Appendix C for a discussion of existing health-care delivery models, and how they might adapt.

47 The Cost of a Reformed Health-Insurance costs) of $29.8 billion (plus other, smaller line-items). System Th e annual growth rate of national health spending is estimated to be reduced by 0.86 percent. Some features of the system that we propose would re- duce total health-care spending; others would increase In other words, if the nation could use the resources it. As coverage increases and approaches the univer- that are now devoted to health care – by employers, sal, more people would seek care. On the other hand, households, and governments – under a system of there would be savings over time as newly covered responsible, cost-conscious consumer choice, then it people receive preventive care, and engage in healthier could aff ord coverage for all – with money left over. lifestyles as a result. More fundamentally, cost-con- Furthermore, the amount left over, relative to the re- scious consumers would gradually migrate toward sults under the status quo, would grow over time. less-expensive plans; and all plans would respond by However, mobilizing the resources now used for seeking effi ciencies to reduce their premiums. Some of health care would be a non-trivial task. For reasons of these changes might occur sooner, while others might fairness, effi ciency and administrative simplicity, we materialize in the future; some might aff ect costs on a believe that the federal government should fi nance the one-time basis, while others could change the rate of premium credits for every consumer to pay private in- growth of costs over a longer period. surers for coverage, and so employers, individuals, and CED plans further research, to include a detailed ac- state and local governments, who now pay much of the tuarial analysis of our recommendations. However, we cost of health care, would no longer need to. For the can draw some tentative conclusions from estimates for federal government to obtain each of those dollars now similar legislation proposed by Senators Ron Wyden spent on health care, it would need to tax employers (D-OR) and Robert F. Bennett (R-UT).n,98 Th ose es- and individuals – which is never popular – and impose timates indicate that total national spending on health “maintenance of eff ort” requirements on state and local care would be less than what it would be if the current governments – which are always inexact and politi- system remained in force – by (assuming for purposes cally divisive. Keeping employers’ premiums fl owing to of analysis that the plan had been eff ective this year) health care would raise the issue of whether fi rms that $4.5 billion (which is a very small percentage) in 2007, do not now purchase insurance – often, arguably, be- and by $336 billion (or 7.7 percent) in 2016. Th e sav- cause they cannot aff ord it – should be made to pay; or, ings in the fi rst year would be a net total that would in- alternatively, whether fi rms that now do pay for their clude $49.0 billion of additional services for the newly own employees should be made implicitly to pay for insured, $54.9 billion of savings from the incentives of other fi rms’ employees as well. Some households now price competition for consumers and insurers, and net pay nothing for their health insurance, because their savings in administration (with costs of the new “ex- employers pay in full; they might resent any assessment changes” off setting reductions in insurer and employer for health care.o Individuals and households that now

m Specifi cally: (1) Th e employer contribution is not a true fi xed-dollar amount. It is set at 70 percent of the average premium of some of the largest plans. But if a plan were to off er a premium lower than the contribution amount, the employee choosing the plan would get to keep only 25 percent of the savings. Th at amounts to a 75 percent tax on effi ciency and a strong disincentive for any plan to off er a premium below that average, which drives up the average. Th e Congress should provide that if any plan off ers a premium below the average (subject to a limitation mentioned next), the employee choosing it can keep 100 percent of the savings. (2) Th e program should specify a standard uniform minimum package that all plans must cover, but let competitors come down to that standard. Establishing a standard minimum package would help to prevent problems of adverse selection (if, for example, one plan were to off er coverage for fertility treatments while another did not, the former systematically would attract some very expensive risks). (3) Th ere ought to be risk adjustment of premiums using state-of-the-art methods, analogous to what is done in Medicare Advantage. (4) Instead of national uniform pricing that does not take account of regional diff erences in the cost of doing business, there ought to be regional pricing. n Th e Wyden and Bennett legislation shares the fundamental traits of the CED recommendations, in that it seeks responsible choices of private insurance by cost-conscious consumers, through what we call “exchanges.” Th eir proposal diff ers mainly in that it would organize insurance choices at the state level, with an active role for state governments, rather than at the federal and regional level; it would fi nance the insurance choices largely through assessments on employers and individual premium payments at the time of annual income tax fi lings, rather than a broadly based tax (or taxes); and it would provide premium support through variable income-conditioned subsidies, rather than fi xed-value payments. We do not believe that these diff erences would have a major eff ect on the overall system cost.

48 eschew insurance also might resent being forced to pay for all. Th e deterioration of the current system has left anything at all, although it is surely arguable that per- growing millions of people without coverage, to the sonal responsibility should require participating in the detriment of their health and of the health-care system, nation’s health insurance risk pool. Th e requirement which must provide uncompensated emergency care. to purchase auto insurance is a fair analogy. Inaction would extend that deterioration – and could lead even to a sudden collapse of the system, if a major In sum, though a reformed health-insurance-fi nancing corporate bankruptcy cost large blocks of workers and system could cut the nation’s total cost of health care retirees their coverage, and induced that fi rm’s compet- and slow its growth, it would by no means end disputes itors to try to abrogate their similar commitments to over who should pay how much of that total, at least in remain cost-competitive. Th e current system is simply the short run. Although no feasible payment scheme not sustainable, and the ill eff ects of the status quo far could hold every individual and every fi rm harmless, exceed the dislocations of a carefully phased transition we believe that a fair solution is attainable, and plan to a sustainable system. further research on this issue. Care Providers. Many segments of the health-care sec- Effects on the Health-Care Industry tor would benefi t from reform. Physicians and other practitioners, hospitals, pharmaceutical fi rms, and pro- Th e health-care industry is now about one-sixth of the viders of health-care devices would be better off , in that U.S. economy. Any marked change in the structure of having more people covered would mean more users of, the industry would have correspondingly broad im- and reliable payers for, their products and services. At pacts. It is important to understand this process, both the same time, of course, those fi rms and individuals because of its eff ect on the economy, and because of would be subject to greater competition, and to more its implications for the political debate on health-care examination of the effi cacy of treatments and proce- reform. dures. Some practitioners and hospitals might need to In the broadest sense, improving the effi ciency of change their practice styles to match more closely what health-care delivery would be no diff erent from im- cost-conscious individual purchasers demand. Sellers proving the delivery of any other good or service: the of pharmaceuticals and medical products might fi nd economy and the nation as a whole would benefi t. Pro- that cost-conscious providers of health care – doctors, cess improvement in health-care delivery could reduce hospitals, and integrated group practices – would be the 16.5 percent of the GDP that is now devoted to more mindful of demonstrated performance and would health care, or the rate of growth of that spending in drive harder bargains, though perhaps for higher vol- the future, or both.p Th e savings in purchases of health umes because more persons would be covered. How- care would be used for other things. However, the ever, over the long run, the outlook for stability and aggregate benefi t of any savings would not protect growth in the health-delivery sector would be much everyone in the health-care sector from any loss of improved under a system of sustainable and universal income. Every dollar of the current 16.5 percent of the coverage. Th ose individuals and fi rms that are willing GDP that is spent on health care is income to some- to compete should welcome reform of the nature that one who works in the industry. If that share of GDP we recommend. declines, some people’s incomes will decline, and some Insurers. Health-care restructuring could be diffi cult people may lose their jobs altogether. for some parts of the insurance industry. Th e avail- Society should be sensitive to these eff ects, and should ability of insurance to all through exchanges would cushion them as much as possible. However, concern increase the number of customers. However, it also about those dislocations should not prevent progress would obviate the need for underwriting and insur- ance sales to fi rms. Some persons who work in those

o Such employees and their employers will face a bargaining issue over whether any employer’s net savings (if its broad-based tax liability is less than its prior health-insurance premiums) should be passed through to its employees in higher cash wages. p Of course, society could choose to spend more, although more eff ectively, on health care.

49 fi elds would be needed for the presentation of in- such fi rms might regret health reform. However, the surance products to individual consumers through number of such fi rms must have shrunk markedly over the exchanges, and for the work of the exchanges in the last 20 years. Furthermore, such fi rms could use risk-equalization of premium revenues. However, the the savings from more-effi cient health care to recruit numbers of such new jobs would be relatively small. employees in other ways. Firms that have not sought Insurance fi rms themselves would be subject to greater to provide coverage for their employees might resist competition, which would favor those fi rms that are making any contribution toward health care, even most able to improve quality and hold down costs. if the same responsibility is placed on all employers. Within employing fi rms, there would be fewer human Employers. Many employers see health care as an im- resources devoted to health care – which has been a portant part of their workers’ lives, and want to be in- growing activity for many years. Firms could choose to volved and support them in maintaining care and good continue to provide information and decision-making health. For employers with highly skilled, highly paid support to their employees. New fi rms might arise employees, health-insurance premiums might still be a to provide such support either directly to individual relatively small share of labor costs, and might still ap- households or through employers. pear manageable. However, the trends documented at the outset of this statement are inexorable: a declining Labor Unions. On the other side of the labor market, percentage of U.S. employers off ers health coverage, workers should be relieved to have guaranteed health- and a declining absolute number – not just a percent- care coverage. Th e last few years have demonstrated age – of American workers and their dependents have clearly that even the apparently most-secure coverage employer coverage. Th ose workers who have coverage can be at risk. At the same time, insurance-market face declining employer premium contributions and competition could be a substantial change for many or- rising deductibles and co-payments. With health-care ganized workers. Unions typically have bargained for costs rising faster than incomes, this situation will not their employers to pay the full cost of health insurance. improve. With all the good will in the world, employ- As explained above, such arrangements lead directly ers as a group cannot maintain aff ordable, quality to health-cost infl ation. It would be in the long-term health insurance for their employees under the current interest of organized workers to bargain for cash wage fl a w e d s y s t e m . increases equal to their employers’ net savings from no longer paying 100 percent of health-insurance premi- Some employers might fi nd health insurance to be ums, net of any health-insurance-earmarked tax in- administratively simple enough, because they buy creases, and then use the higher wages to choose their “full-replacement” coverage, under which one carrier own cost-effi cient health-care plans. provides insurance for all of a fi rm’s employees. Insur- ers prefer this approach as well, as protection against States and Localities. Several states already have acted, “slice business.” However, as explained earlier, this or have begun to act, to reform health-care fi nance. type of coverage is inherently infl ationary. Th erefore, However, few if any states would be concerned if the all things considered, employers who seek to provide federal government should preempt the issue; policy- coverage should be pleased at the establishment of a makers of the states that have acted invariably have large and stable risk pool, with employees choosing the said that they did so because the federal government care they want, and the entire administrative burden had not. And although state action is welcome, and assumed by the exchange. Employers also should be will foster innovation and expand coverage, the states relieved that the growing burden of insurance costs is clearly are not best positioned to advance strong re- lifted from them, and that they can direct their eff orts form. Th e federal government has the fi rst access to more at competing in their own markets and less at the substantial resources needed to do the job properly. managing health care. Left to their own resources, wealthier states will have a marked advantage over neighboring, poorer states, Managers of some fi rms might believe that they have meaning that the wealthier states may increase their special expertise at providing health insurance and that advantages as locations for future job creation. And their plans provide a worker-recruitment advantage; most fundamentally, individual states have insuffi cient leverage over the entire U.S. health-fi nance system to

50 achieve process improvement and cost control. With step. Th e health-care sector constitutes a massive the federal-level reform we contemplate, on the other one-sixth of the economy. It has invested billions of hand, the heavy state responsibility for the Medicaid dollars in buildings and health-care hardware (such as program should ease substantially. Both states and the various diagnostic testing machines), which can- localities, including local public hospitals, should do not instantaneously be liquefi ed and re-cast as diff erent better because of reduced cost to care for the unin- health-care instruments that might be more useful and sured and the low-income population. effi cient. It also includes many thousands of profes- sionals who have learned particular skills and cannot In sum, cost-saving economic change has occurred in themselves be redeployed instantaneously in other countless sectors of the economy – in shifts from me- specialties to reduce costs. And, incidentally, health chanical to electronic wrist watches, from fi lm to digi- care is a growing employer – one of the largest in the tal photography, and from paper to digital information economy. Any effi ciency-improving reform will take transmission, to name only a few. International trade, years of painstaking innovation, and will aff ect the lives broadly, fi ts the same mold. All such changes make of many people as workers and investors – not just as society as a whole better off , but entail some disloca- patients. tion. In every such instance, economists are nearly unanimous that productivity advancements must be Th e next chapter will describe a practical transition encouraged, but that those who are dislocated must be from where we are to sustainable and more-effi cient helped. Resisting productivity improvements would medical care. It will emphasize the need for steady, reduce standards of living for the nation as a whole visible progress toward clearly articulated goals, while and would continue to drain government budgets and moving at a pace that is manageable for the existing crowd out other public investments. In the instance industry and its work force. of health care, these dangers are already evident, as workers receive lower after-health-insurance pay, fi rms burdened by health-care costs lose business to competi- tors from abroad, and state and local governments cut education spending to pay for health care. Health-care reform remains imperative even accounting for any economic dislocations.

Conclusion It is unclear whether the nation could move to a radi- cally improved health-insurance system in one giant

51 52 Chapter Five: How Might We Get There? A Path to Consumer-Choice-Driven Universal Health Insurance in Feasible Incremental Steps

Our democracy moves in incremental steps. Th e polit- Th e proposed transition builds on the experience of ical process resists sudden, large, discontinuous chang- existing models – which in many cases have worked es with uncertain consequences. Quantum change is well for decades. It adapts some existing institutions, rare in peacetime or in the absence of a major upheaval such as the FEHBP, to new roles. Also, it builds a new such as deep recession or depression. Medicare, which institution – a “Federal Health Insurance Board” or now spends about $350 billion per year, was started in “Health Fed,” patterned on the governance, expertise 1965 with the thin end of an implementation wedge and regional structure of the Federal Reserve System – and wildly unrealistic estimates of how much it would to oversee, regulate and manage the system. cost: there was limited awareness of just how momen- tous a decision it was. Phase I: Building the Foundations for Th e failings in cost, quality and access in American Responsible Choice health care today have become extremely serious, and To move from the current health-care system to sustain- the changes needed in our health-care fi nancing and able, aff ordable, quality care for all, CED recommends delivery system are fundamental and far-reaching. the following transitional policy steps: Fundamentally reorienting the underlying fi nancial in- centives of a $2 trillion industry is a huge undertaking. • To create an appropriate administrative structure: Th e industry must change from being cost-unconscious modernize and adapt the FEHBP to make it the and cost-increasing to cost and value conscious. Some framework for a national system of health insurance see the entire health-care problem as the large and exchanges. Put the FEHBP under the supervision of growing number of people without health insurance, a new agency patterned on the Federal Reserve Board. and there is a crying need for universal coverage. How- Here we will refer to it as the “Health Fed.” ever, as the analysis above makes clear, there can be no • To ease market entry across the country, to make secure coverage for anyone unless the growth of costs health care more competitive and less costly, and to is slowed to a sustainable rate, through a transforma- eliminate confl icts between state and federal regulation tion that optimistically will take a decade of constant of health insurance: modernize and simplify health eff ort and innovation, with attendant dislocation in the insurance regulation by creating an alternative federal health-care industry.* regulatory system that multi-state health plans can To achieve this fundamental restructuring through choose. Designate the Health Fed as the regulatory a political process that values stability, this chapter agency. lays out a path of bold – but feasible – incremental • To provide reliable, objective and authoritative scien- steps that could produce steady progress, and in the tifi c information about the value and costs of clinical end achieve market-based universal health insurance. interventions: create a national institute for medical We do not claim that the proposed transition is the outcomes and technology assessment, or build it onto only way to get our country to universal market-based the National Institutes of Health (NIH) Translation- health insurance, or even the best way. Rather, we be- al Medicine Program which determines the eff ective- lieve that it demonstrates that, given political will and ness of new technology and procedures in the delivery support, it would be possible to get there from here. system. It is what mathematicians call “proving an existence theorem.”

*See Memorandum, page 86

53 • To reverse the recent erosion of health-insurance cover- the profi ts gained there to undercut local delivery age, and the consequent growth in the number of the systems in high-cost areas. Insurers should not uninsured: expand existing safety-net programs, espe- compete on the basis of market strategies to take cially the State Children’s Health Insurance Program advantage of geographic diff erences, but instead (SCHIP), pending the availability of true universal should organize better care at less cost. In turn, coverage. the government’s premium credits or fi xed-dollar contribution payments should be adjusted for First, to adapt the FEHBP to a new expanded mis- regional costs and prices, as in Medicare’s prospec- sion, policy-makers must correct some of its features tive payment system for hospitals. National pric- that would confl ict with that role. Th ose steps should ing is unnecessarily expensive: good coverage costs include: less in Minnesota than in Massachusetts. • Replace the present employer-contribution amount Th e FEHBP is a sound model because it has a success- (70 percent of the average of the largest plans) ful history of more than 40 years; it is well known at with a genuine fi xed-dollar contribution, region- least to Members of Congress and their staff s, who use ally adjusted, so that those who choose plans that it to obtain their health insurance; and several promi- cost less than the contribution keep 100 percent of nent current and former Senators of both parties have the savings, not the 25 percent they now may keep. spoken favorably of opening up the FEHBP, at least Today’s model gives little incentive to any health to small employers.99 Building on the FEHBP would insurer to off er a plan priced below the contribu- demonstrate that the proposed system would work. tion amount, and instead tilts the fi nancial incen- For Federal employees, this step could increase choices tives in the direction of higher prices. and competition centered on satisfying employees. It • Risk-equalize premium revenue, similar to what is might also ease the strain on the Federal budget. done in Medicare, nationwide in the Netherlands, Using the FEHBP as a model would give new exchang- and in similar delivery systems in the United es a rich experience base. Actually adding non-federal States. As explained earlier, risk equalization is workers to the FEHBP might cause federal employees, essential to getting incentives right – and particu- including Members of Congress, to fear a worsening larly to avoiding uncompensated adverse selection. of their risk pool, saddling them with higher premi- • Establish a minimum benefi t standard for all ums. One solution would be to manage two separate plans, allowing them to off er broader coverage at risk pools: federal employees and private-sector-group their own choice. Otherwise, there would be an employees. However, as proposed, private employers endless “race to the bottom,” as plans would raise might bring in younger, less-costly employees. In any deductibles so that they could attract a better risk case, this problem could be measured and appropriate mix. For Federal employees now, and later for adjustments made, and it would seem fair for Members citizens in general, there must be a fl oor under the of Congress and Federal employees to live under the benefi ts that must be covered – especially to pro- system that serves the American public. tect people with modest incomes. Today, under Th e FEHBP should be put under the supervision of a the FEHBP, the OPM has the authority to decide new Federal Health Insurance Board or “Health Fed,” whether a proposed benefi t plan is adequate. modeled on the Federal Reserve Board. Th e Health • Health plans in the FEHBP today quote the same Fed would oversee a network of regional exchanges prices wherever they operate, rather than charging and direct their operation, and become the regulator diff erent prices in diff erent regions. Instead, plans of health insurance for insurers choosing the national should set regional market prices refl ecting costs regulatory option (described below). Like the Federal in each geographic area. Single national prices Reserve, the Health Fed Board would make judgments distort market signals. For example, with uniform about complex issues such as the specifi c details of cov- national pricing, a national plan with signifi cant erage contracts and acceptable business practices. Also operations in low-cost areas may be able to use like the Federal Reserve, the Health Fed would be fee-

54 funded and thus not subject to annual appropriations.a Risk equalization methods would be set forth by the One potential funding source is a small percentage of Health Fed, informed by the experience and insights of all health insurance premiums; for example, in 2006, the regional exchanges.b a one percent assessment on premiums would have Create an alternative federal regulatory system that yielded over $6 billion. participating multi-state health insurers can choose. Th e Health Fed would be semi-independent. Its gov- Designate the Health Fed as the regulatory agency. ernors would be appointed for fourteen-year terms. Health insurance, like all other forms of insurance, is Th ey would not be drawn as ex-offi cio, but rather regulated by the states – and was so even before the would be the best candidates with knowledge of the McCarran-Ferguson Act of 1946 codifi ed their au- complexities of health care, without personal confl icts thority. Regulation by the states is costly, complex of interest. Th ey would be supported by an expert and various.100,c It is a barrier to fi rms entering new staff that could be drawn from the existing agencies of states, and a cause of confl ict between federal and state Congress and the executive, such as the Medicare Pay- laws.101 Health insurance is now a national industry, ment Advisory Commission, the Agency for Health and public policy should encourage established health- Research and Quality, and perhaps the Centers for care fi nancing and delivery systems to expand to other Medicare and Medicaid Services, as well as from state states in the interest of greater competition, by off ering governments. Th e board and its staff could build on them an option of uniform national regulation – espe- the work of the National Association of Insurance cially in a national system of health insurance. Commissioners (NAIC), which has been successful in State insurance regulators recognized the diffi culty moving to national fi nancial standards. It could seek of individual states dealing with very large national input broadly to establish the regulatory framework for and international insurers. To develop appropriate those insurers who choose national accreditation. tools and standards, they created a private entity, the If a network of independent regional exchanges was NAIC, which promotes uniform national standards.d chosen to manage the regional markets, the Board But no matter how sophisticated these standards, state would establish their locations and responsibilities. regulators have been unable to facilitate and acceler- Regional exchange presidents or chairs could be se- ate market entry. To market a new national insurance lected by the national Health Fed Governors, while product, an insurer must go hat-in-hand from state to the remaining offi cers could be elected from among the state to secure approval. Beyond the sheer red tape, appropriate stakeholders. Th e Health Fed would es- each state imposes unique standards, such as diff erent tablish standards to be used by all regional exchanges. minimum benefi t requirements. Most states, further- Th e standards would ensure that the exchanges oper- more, regulate health insurance rates, further delaying ated fairly, transparently and uniformly, that the plans’ market entry. Contrast this with a federally chartered off erings were easily understood, and that the plans banking product or a mutual fund: once approved by met fi nancial, quality and service standards. Regional a federal regulator, the new product can be marketed exchanges could have both regulatory and research throughout the United States. staff s to understand and evaluate innovative programs.

a Th e Federal Reserve is funded by the interest on its portfolio (mostly U.S. Government securities) and fees for its services to banks. It returns the excess above its expenses to the U.S. Treasury. b more extensive discussion of the management functions of the Health Fed is presented in Appendix D. c An example is regulation of managed care in California, which was created in the aftermath of a scandal with respect to Medicaid in the 1970s, and endures and becomes increasingly complex even though it bears no relation to established prepaid group practices or other health insurers, and mar- ket conditions have changed dramatically. d Th e NAIC’s greatest success has been in the development of uniform fi nancial standards – for example, risk-based capital standards, standard statutory accounting principles, and uniform fi nancial statements. Th ose standards are enforced through a detailed system of accreditation, which all but one state (New York) follow. Th e NAIC has also developed uniform fi nancial examination and market-conduct examination procedures, and encouraged multi-state examinations to achieve consistency from state to state.

55 Particularly in the health-insurance market, however, “vote with their feet” at the next annual enroll- insurers do not uniformly oppose state regulation. ment, and the off ending plans would have to Many Blue Cross-Blue Shield plans are one-state cor- respond to those concerns to survive. porations and would not choose to supplant state regu- • More so than 20 years ago, there is now an urgent lation with a federal regulatory system. It would make need to improve value for money and limit cost sense, therefore, to consider an optional federal charter growth to sustainable rates. for health insurance: dual federal and state regulation of health insurance similar in concept to the dual regu- Given these changing concerns, and under the pro- latory structure for banking. Th rough Medicare, Med- posed new health-care market, the following guidelines icaid, the FEHBP, the Health Insurance Portability for national regulation of health plans are appropriate: and Accountability Act of 1996, the Employee Retire- ment Income Security Act, the Consolidated Omnibus • Regulation should be uniform toward all types of Budget Reconciliation Act of 1986 (COBRA), and the health plans. No plan model should have restric- HMO Act, the federal government already actively tions or permissions not applied to all others. A regulates health insurance. A federal regulatory op- patients’ bill of rights and responsibilities should tion would enhance simplicity and consistency. apply to all plans equally. It is timely to rethink regulation today. Th e situation • Regulation should allow reasonable cost-benefi t now – especially as it would be with consumer choice tradeoff s. Technologies that confer small marginal and universal health insurance – is very diff erent from health benefi ts at great costs should not be 1977 or even 1997. Th e regulatory framework today required in a system that strives to make health should refl ect new conditions and public-policy goals. care aff ordable. First, in a regime of consumer choice, many earlier • Because innovation to improve value for money is concerns about insurer behavior would be lessened a central goal of policy, there should be an optional or eliminated. For one example, the earlier backlash single source of regulation at the federal level to against managed care, which sparked much regulatory speed new product approval, spread cost-reducing activity, was concentrated among the people who were innovations from one state to another, and slow assigned to such plans by their employers, without health-expenditure growth to a sustainable rate. choice and without visible savings for themselves.102 • Regulation should encourage large multi-state Also, physicians were upset that managed care was insurers to enter many or all regional markets with spread coercively. However, more recently, the leaders risk-bearing plans, to increase competition. of the American Medical Association have proposed universal coverage through a system of subsidized, • Regulators should recognize that an informed- responsible individual consumer choice of health plan choice system would obviate the need for much ex- quite similar to our proposal.103 Finally, the very high isting regulation, so that diff erent delivery-system market shares, approximately 80 percent, of managed designs, including those that share cost-reduction care in groups with responsible choices belies the no- gains with providers, can challenge one another in tion that the American people do not like managed the marketplace to spur effi ciency. care plans that they themselves can choose. Th is Health Fed is a fi tting model for the agency that • Furthermore, in the proposed universal health would modernize and simplify health-insurance regu- insurance model, every person would be in the lation, and also provide an alternative federal regula- “large-group” market that would be far more cus- tory system. It is based on a trusted semi-independent tomer-friendly than today’s markets for individuals governmental agency: the Federal Reserve Board of and small groups. Governors. Th e Federal Reserve model would convey impartiality, expertise, freedom from narrow political • A consumer-choice-of-plan model gives people a interests, stability, and a long-term perspective with a more convenient outlet for expressing dissatisfac- board of governors serving long terms. tion than contacting a regulator. Th ey can simply

56 Although health care is both diff erent from and more For decades, there have been calls for more systematic complex than banking, it already is a shared responsi- assessment of medical technologies, clinical interven- bility of the state and federal governments – like the tions, and outcomes – and more recently, similar calls banking industry since 1913, when the fi nal legisla- for formalized comparative eff ectiveness studies.106 tion establishing the Federal Reserve was enacted. Yet federal support has been limited and seemingly Th at law was a political compromise, which echoes the haphazard. Existing organizations cannot objectively health-care environment today.104 evaluate medical technologies and practices, because of inadequate resources and fragmented eff orts.g In one Create a national institute for medical outcomes and well-publicized case, a federal agency that did such a technology assessment.105 In contrast to the dynamism study suff ered severe budgetary retaliation from dis- of other industries, the health-care delivery system is gruntled surgeons who did not like the fi ndings, and largely unevaluated after more than 50 years of stag- who took their disagreements to Congress.107 Private nant business practices and third-party payment. entities have tried to fi ll the gap, but their work has Th ere is a paucity of reliable and objective scientifi c been limited and rarely targeted towards the needs of information about the value and costs of clinical the general public. interventions, even while costly technologies are widely deployed because the Medicare law in eff ect forbids Th e health-care system urgently needs a new entity, cost consideration in approving new technologies, which might be called the Institute for Medical Out- and private insurers are reluctant to deny coverage of comes and Technology Assessment (IMOTA), to as- technologies for reasons of cost. Most patients assume sess the eff ectiveness, cost and overall value of health that their doctors are up-to-date on widely accepted interventions and practices – including drugs, devices, standards of care; but the data on practice variations diagnostic tests, and medical practices and procedures. among apparently well-qualifi ed doctors raise serious IMOTA could make recommendations for how to doubt. Much is spent on services of little or no value, integrate new drugs or devices into the delivery sys- as evidenced by the lack of demonstrably better out- tem to realize savings – that is, process redesign. For comes in the United States compared with countries example, it might consider how a new product enables that spend much less on health care. improved processes. Th e lack of authoritative evaluation has led to highly IMOTA would need a stable budget, large enough for publicized, costly, and bitter political and legal its complex mission, to provide thorough insulation disputes.e History illustrates a lack of knowledge of from short-term political pressures. It must be rigor- comparative eff ectiveness, with high dollar and human ously protected from confl icts of interest, and account- costs.f We need a widely respected institution to able to the public. One potential model would be to sponsor the needed research and off er authoritative make IMOTA, like the health-insurance exchange judgments.

e One example is the battle over High Dose Chemotherapy combined with Autologous Bone Marrow or Stem Cell Transplant (HDC/ABMT) therapy for metastatic breast cancer. Th is treatment was very costly ($150,000 or more if complications occurred) and hastened the deaths of some patients. At least one health plan suff ered a $77 million punitive damages award, and an $89 million total awarded to the plaintiff , for not providing or paying for it. Under intense Congressional pressure, the Offi ce of Personnel Management (OPM) reversed its previous policy of waiting for evi- dence of effi cacy and directed all health plans for Federal employees to cover it. Randomized clinical trials published in 1999 found that it conferred no survival value, and the procedure is no longer used. More than 30,000 women received the treatment, shortening their lives and adding to their suff ering. See R. A. Rettig et al., False Hope: Bone Marrow Transplantation for Breast Cancer (New York: Oxford University Press, 2007); Michelle M. Mello and Troyen A. Brennan, “Th e Controversy Over High-Dose Chemotherapy with Autologous Bone Marrow Transplant for Breast Cancer,” Health Aff airs 20, no. 5 (2001): pp. 101-117; David Atkins, Joanna Siegel, and Jean Slutsky, “Making Policy When the Evidence Is in Dispute,” Health Aff airs 24, no. 1 (2005): pp. 102-111. A later development in the same general fi eld, causing similar controversy, is computer-aided detection, or CAD, in mammograms for breast cancer. Gina Kolata, “Study Questions Computerized Breast Cancer Detection,” New York Times, April 5, 2007, p. A14. f A new vivid example of the uncertainty about eff ectiveness is a dispute over the use of two diff erent drugs, one relatively inexpensive, one enormous- ly costly (ironically manufactured by the same fi rm), to treat macular degeneration in elderly persons. Marilyn Chase, “Genentech’s Big Drug for Eyes Faces a Rival,” Wall Street Journal, February 22, 2007, p. A1. g For example, the entire budget of the Agency for Health Research and Quality is less than 0.025 percent of total health spending – $500 million compared with $2 trillion.

57 system, a part of the Health Fed. Like the Federal Phase II: Progressively Expand Coverage Reserve Board, IMOTA should be freestanding and semi-autonomous. Its board should resemble the As the second phase of transition to market-based uni- Federal Reserve in selection of members, numbers versal health insurance, CED recommends: and terms. Th e board should set priorities, approve • Extending the availability of a wide range of respon- research, oversee staff and operations, coordinate with sible choices of insurance carriers and delivery systems outside health groups, and ensure integrity and inde- within the employment-based health insurance system pendence. Th e director should brief Congress periodi- by including all small employers (of up to 50 or 100 cally. Like the funding of the Health Fed, funding for employees) in the new exchange system. IMOTA should come from the health-care fi nancing system without annual appropriations.h • Progressively expanding participation in the new system until all employers are included. Include the IMOTA would provide analyses, evaluations and fi nd- self-employed. Th e system could, and perhaps should, ings. It would not itself make decisions about coverage. be open to entire states at the request of the governors Rather, such decisions would remain with the same and legislatures.j agencies and private insurers now responsible for them.i • When all employees have a wide range of competi- Expand existing safety-net programs, especially the tive plan choices, creating employee cost consciousness State Children’s Health Insurance Program. Th e in plan choices, and saving billions of tax dollars for primary motivation for health-care reform is to ensure subsidies for health-insurance purchases by low-income secure protection for every American. It follows that people by capping the tax exclusion for employer special early eff ort is required to protect those who health benefi ts at the level of an effi cient health plan currently have no protection at all – even though premium in each region. cost-reducing restructuring ultimately will be needed to make all coverage sustainable. Th e State Children’s • Expanding the functions of the “Health Fed.” Health Insurance Program (SCHIP) has successfully Include all small employers in the new exchange-based extended Medicaid coverage to children in households system. Small employers could more easily secure with incomes below 200 percent of the poverty aff ordable, reliable health insurance if included in 108 threshold in most states. Further eff orts could raise large, balanced, and stable risk pools in the regional the income limits, extend coverage to the now-eligible exchanges. children’s parents, or otherwise provide Medicaid coverage to reduce the number of the uninsured pend- One key to sustainable health-insurance coverage is ing the provision of true universal coverage. Th is is an a stable risk pool. Creating such a pool is not easy.109 eff ort similar in spirit to the various state reform plans, Seven states, including California, Florida and Texas, and it should be widely accepted as an interim step in a tried to create voluntary purchasing exchanges for comprehensive program to provide universal access to small employers. None succeeded; none achieved a private health insurance. large enough market share to have signifi cant econo- mies of scale.

h Another approach would be to attach IMOTA to the Translational Medicine Program of the NIH, whose mission includes measuring the com- parative eff ectiveness of new delivery-system technology. Th at program integrates eff ectiveness comparisons into new product development, and its work could be seamlessly added to delivery science. However, the NIH lacks the secure funding and political independence of the Health Fed. Inde- pendent funding would enable IMOTA to meet the needs of the public even when it threatens powerful political interests. i Th is point is the key diff erence between what we recommend and the similar British National Institute for Health and Clinical Excellence (NICE), which in the nationalized British system is perceived to have greater control of actual practice decisions. For a more extensive discussion of the func- tions of IMOTA, see Appendix E. j Th e Employee Retirement Income Security Act would have to be changed by Congress and the President to allow states to make such decisions for all their residents.

58 Th ese purchasing exchanges encountered numerous Although a purely voluntary risk pool would not suc- barriers. Contrary to expectations, employers did not ceed, there is an enduring American preference for fi nd the approach particularly attractive; off ering com- voluntary action over compulsion, so strictly manda- peting choices of health insurers has rarely been a high tory risk pooling is unwelcome. However, the present employer priority.k Th e exchanges also had structural “voluntary” health insurance system is actually much defects.110,l Finally, such eff orts are highly vulnerable less voluntary than it appears. It is motivated by huge to adverse selection, witness particularly the experience tax subsidies. Th e Federal Government fi rst takes in California.111,m from taxpayers nearly $200 billion per year, and then gives it back in the form of tax remission if they or Despite this troubling experience, it is in the long- their employers purchase health insurance. Th ese tax term interest of every small employer – even one with subsidies impose their own powerful conditions; in a low-risk group – to be in a large, stable pool and buy particular, they are much more generous if insurance through the proposed exchanges. A low risk today is provided by employers, and they are open-ended. may become a high risk tomorrow, with no guarantee Th us, these subsidies unfortunately encourage the pur- that aff ordable insurance will remain available when chase of more-costly rather than less-costly insurance, an employee becomes seriously ill. Furthermore, all and steer people toward insurance provided by their groups buying through an exchange would have greatly employers, which has had the eff ect of limiting choices. reduced administrative costs, more-stable premiums, So it seems reasonable to reshape the tax subsidies to and choice for every employee. encourage more, and more-economical, choices, and Th us, the community at large is far better off as health- broader-based pooling. insurance risk pools become larger and more stable. A One way to accomplish those objectives would be to re- large part of the deterioration of secure health-insur- quire all employers of 50 or fewer (or 100 or fewer) em- ance coverage over the last 50 years has been the onset ployees to buy their insurance through the local region- of “cherry picking” of comparatively large, young and al exchange to continue to receive the tax exclusion.n healthy employment groups by aggressive insurers, Th is incentive would motivate the good risks to join which leaves increasing numbers of small groups out in with the bad risks in a large and stable pool. A 100- the cold. Reestablishing a large risk pool is essential to employee cutoff would create a pool of about one-third aff ordable health-care security for every American. A of the labor force, which would be more than large public-policy initiative is required to attract numerous enough to absorb and spread the risks of even the less- individual smaller groups to band together and stay healthy employees of small fi rms – given that healthy together, to form a viable risk pool. groups would participate to receive the tax exclusion

k In California, participating PPOs were driven from the exchange by adverse selection, and many company owners then left because they apparently wanted the PPO for themselves, but were willing to pay only for HMOs for their employees. Agents did not like the exchanges and did not try to sell them, because the exchanges at fi rst did not pay agent commissions. When the exchanges did start paying commissions, their administrative costs increased. Insurers did not like the pools because they do not like “slice business,” with its higher administrative costs and possible adverse selection. l For example, at least some pools did not have master contracts, thus necessitating separate contracts between each health plan and each employer, and thereby precluding hoped-for savings. Th e exchanges had a social mission – making insurance available to small groups – but had to compete in a business environment. Th e small-employer exchanges attracted a disproportionate share of tiny groups (two or three), which tend to buy coverage because someone in the group needs expensive medical care. Th e Health Insurance Plan of California (HIPC) did not participate in this market, because competing carriers were able to price good risks more favorably outside the exchange. And apparently, exchanges could not compel employ- ers to make fi xed-dollar contributions. m Th e HIPC, started in 1993 on a small budget, was transferred to the ownership of Pacifi c Business Group on Health (PBGH), a large employer coalition, in 1999. In 2006, PBGH closed the exchange because one of the participating carriers was persistently losing money, apparently because of adverse selection Another voluntary small employer pool, California Choice, has survived. It is a private for profi t business, not encumbered by rules requiring it to underwrite more generously than the market in general. Its managers believe that they cannot require participating employers to make fi xed-dollar contributions, so price competition within the pool is attenuated. n Th is follows the thinking behind the Managed Competition Act, H.R. 5936, 102nd Congress, 2nd session, September 1992, introduced by Congressmen Cooper, Andrews and Stenholm plus about 80 cosponsors from the Conservative Democratic Forum. Th ere are likely to be serious administrative and enforcement problems with using the number of employees as the basis for deciding which employers get into a pool and which do not. Do part-time employees count? And what about employers whose workforces fl uctuate? Th ese problems would be more severe if the intent were to stop the process at employers of 50 or 100. Th ey should be less severe if this is part of an overall plan to cover everyone through exchanges. Th e reason for starting with small employers is that they need exchanges more, being less likely to provide insurance now.

59 and the advantages of the exchange. A similar incen- Individuals and fi rms would be, of course, entirely free tive is at work today, because employer contributions to buy and sell health insurance outside of the ex- are usually available only to employees who enroll in change framework, but in that case they would not be the plan the employer sponsors. A Federal employee, eligible for the tax subsidies. for example, cannot escape the FEHBP pool without Th ird, to build universal cost consciousness in the choice forfeiting the large employer contribution. Th us, the of a health plan, and also to free resources to subsi- tax exclusion already is a powerful incentive to pool dize access for low-income people: once all employees risks. Th is same incentive could motivate pooling in have choices of plans, limit the amount of the employer exchanges. contribution to employee health insurance that can be Starting with small fi rms would help them to maintain excluded from the taxable incomes of employees and insurance at stable premiums. One serious illness can from employer taxable incomes. Th e President’s Ad- cause small-group premiums to skyrocket. Th e tax visory Panel on Federal Tax Reform recommended a break should be enough incentive to get a representa- limit on the exclusion from employee taxable incomes, tive sample of risks from many small fi rms into the though it was initially for an amount likely to be higher exchange. Also, participating fi rms must be required than the needs of an effi cient plan.112 President Bush, to make fi xed-dollar contributions, not to exceed the in his 2007 State of the Union address, proposed a price of the low-priced plan. Participating fi rms that version of this limit to help fi nance a tax incentive for outgrow this size class could be allowed to continue in people without employer-based health insurance to the exchange, subject to some underwriting rules that buy in the individual market. Some objected to this protect the pool from adverse selection, if necessary. proposal because employed people who are not off ered Th e exchange could also combine contributions from effi cient choices by their employers could not respond multiple employers if members of a household have to the new incentive. Th e market for individual policies part-time jobs, or jobs that otherwise do not support would not help those employees, because in most states family health insurance. that market has no community rating or guaranteed issue, and the many people with chronic conditions When the new system is up and running, demonstrat- would not have access to aff ordable coverage – or pos- ing its success, the fi rm-size threshold should be raised sibly any coverage at all. However, with market-based progressively to 200 employees, then 500 employees, universal health insurance including consumer choice, and so on, until all employees are covered. Exchanges everyone would have guaranteed issue and the same could cover size-qualifying smaller branches of large price for the same class of coverage regardless of health national employers who would like to participate, with status. Th erefore, a limit on the tax preference would any necessary underwriting conditions to protect the be an important and necessary step to create incentives new system. Alternatively, entire states could be al- for economical choice and fairness. Why should tax- lowed or encouraged to opt into the exchange system. payers continue to subsidize more-costly choices, when Th e self-employed could join the system at this point, good-quality, less-costly choices are available? if not sooner, equalizing the tax treatment of health Th e limit on tax-free contributions would prevent em- insurance among the self-employed, other individu- ployees from demanding supplemental payments from als, and recipients of employer-based health insurance their employers that would subsidize more-expensive, (as President Bush proposed in his fi scal year 2008 ineffi cient health plans, and undermine competition budget). Th e exchanges could off er the self-employed to attract cost-conscious consumers. To the same end, guaranteed coverage, provided they enroll promptly employers should be required to make fi xed-dollar and stay enrolled. Exchanges should create rules, such contributions as a condition of employees receiving as an individual mandate or an additional tax incen- the exclusion of employer contributions from taxable tive, to deter the self-employed from opportunistic income.o switching in and out of coverage. o Th is follows from the HMO Act and the Managed Competition Acts of 1992 and 1993, H.R. 5936, 102nd Congress, 2nd session, September 15, 1992.

60 Fourth, expand the functions of the “Health Fed.” Re- system – including non-poor individuals not eligible search on the progress of Phase II should begin with for Medicaid, such as pre-Medicare widows; those not its inception. Th e Health Fed should integrate data poor but not employed; other non-employed, unem- from the exchange system and other national agen- ployed, self-employed uninsurable persons, and oth- cies. Like the Federal Reserve, it should issue periodic ers – would still lack coverage unless other remedial “Beige Books” to describe available plans and their actions, perhaps fi nanced by the proceeds of the cap on aff ordability, and the performance of the plans and the tax exclusion of employer-paid health insurance, providers. Th is would facilitate public discussion of were taken in the meantime.114,p With such initiatives, the aff ordability of health plans, what services should the exchange infrastructure could create a platform to be covered, and targets and strategy for performance, expand coverage to more and more people. It could do effi ciency, and quality improvement with universal a lot of good even short of complete UHI. coverage. If health expenditures continue to grow un- How would we get from there to market-based uni- sustainably, the Health Fed should analyze the causes, versal health insurance? At some point, all employer and report to the Congress with recommendations. contributions should be replaced by fi xed-dollar con- tributions (or “premium credits”) paid for by broad- Phase III: Achieve Market-Based Universal based taxes, supplemented by the large savings to the Health Insurance federal and state budgets from phasing out the many As the fi nal stage of the transition to market-based uni- tax subsidies and programs that would be supplanted versal health insurance, CED recommends: by UHI.q,115 • To complete the transition to universal health insur- Existing federal health-insurance programs might be at ance: replace all employer contributions with univer- least partially replaced by the universal health insur- sal fi xed-dollar credits fi nanced by broad-based tax ance program. Medicaid should be left alone until the revenues. new program is up and running. Th en, some Medic- aid benefi ciaries, including lower-income non-elderly • To help fi nance these credits: eliminate any tax break families, might be given a choice of the new system or for employer-paid health insurance or health-care Medicaid. Medicaid pays for nursing home arrange- benefi ts. ments and other custodial care that would not fi t into Completing the transition to MB-UHI. At the end of health insurance as we know it; such services clearly Phase II, the transformation to UHI would remain need to be continued. Detailed analysis is needed. incomplete. Health insurance would still be based Similar analyses would be needed for Defense Depart- on employment, although there would be economies ment programs for the military and their families, and of scale in administration, near universal access to for veterans. choices, and transparency in prices. Th e inability of Medicare, to remain fi scally viable and to complete employers to create competition would be overcome.113 these reforms, must eventually evolve into an effi cient, However, those left out of the present employer-based competitive system along these lines, possibley as an

p Programs to help such uninsured people could include the insurance continuity under the Consolidated Omnibus Budget Reconciliation Act (known as COBRA continuity), administered by the exchanges without a time limit and with possible government subsidies, and other subsidies for low-income people. Th e COBRA continuity could be to membership in the exchange, with freedom to change plans at the annual enrollment. Unemployment insurance could include a health-insurance subsidy, similar to the Health Coverage Tax Credit of the Trade Adjustment Assistance program. q First in the list of redundant programs would be the large federal and state tax subsidies to employment-based health insurance, estimated at $209 billion in 2006. Th e portion of Disproportionate Share payments to hospitals to compensate for serving large numbers of uninsured people would be replaced by insurance reimbursement. SCHIP would be replaced by MB-UHI. Th e new system also could and should replace Federal and state employees health benefi ts programs. Perhaps some billions could be saved in substance abuse and mental health services, Indian health, and some programs from the Health Resources and Services Administration, whose costs and services would be included in the MB-UHI estimates. Further CED research will present estimates of the costs and revenues of some of the main possibilities.

61 extension of the Medicare Advantage program, but Conclusion with competitive pricing by plans. Th e new MB-UHI system could absorb Medicare by allowing people, as Th e program outlined here has the greatest prospect they reach age 65, to remain in the plan and delivery of achieving the three goals of restraining health-care system of their choice, with appropriate federal premi- cost, achieving universal insurance coverage, and im- um support and risk-adjusted pricing. proving quality. Without signifi cant process improve- ment in the health-care industry, even the current cov- As mentioned earlier, as a funding source for the fi xed- erage and quality of service – for both private insurers dollar contributions, a payroll tax could be seen as and public programs – will become increasingly unaf- replacing employer contributions to health insurance fordable, as it has consistently for decades. without drastically changing money fl ows or being seen as a “new tax.” Also, the administrative processes for Merely extending coverage under the current system – collecting payroll taxes already exist. Many employers even to universal coverage, such as off ered by “Medicare who now insure their employees might prefer a payroll for all” – would not solve the problem. It would signifi - tax that is a defi ned and predictable amount, rather cantly increase total costs, even after whatever savings than their commitment to today’s soaring health insur- might be achieved by expanding preventive care and ance costs. (Today, employer-based health insurance reducing administrative expense. More importantly, it acts like a head tax.) But there are other possibilities, would not slow the unsustainable growth of health-care including a broadly based consumption tax that would expenditures, and so would force rationing, cutbacks in not tax productive eff ort, and likely would be harder to coverage, or other unsatisfactory policies. Alternatively, evade by people working “off the books.”116 Environ- “consumer-directed health plans” – with high deduct- mental protection and reduced dependence on foreign ibles, possibly off set by health savings accounts – would oil might be served by a tax on carbon or gasoline. provide no incentive to providers to increase effi ciency One way partially to phase out the subsidy of the pre- with respect to the vast bulk of health spending that mium credit without increasing marginal income tax is beyond reasonable deductibles. CDHPs also would rates would be to include the credit in taxable income. leave many persons of low or modest income with un- insured deductible costs that they could not aff ord, and As an alternative to our recommended fi nancing sys- with little or no tax benefi t to help them. tem, which provides a fi xed premium credit to every- one, premiums could be collected through the income If the United States is to achieve sustainable, quality, tax system, with subsidies for low-income people aff ordable health care, the health sector must achieve phased out with increasing income. Th ere could be the improvement in effi ciency that has become individual mandates to require that everyone partici- commonplace in virtually every other sector of the pate in the risk pool. Phasing out subsidies, of course, economy. Th is necessarily will entail some change in raises implicit marginal tax rates; and individual man- the way care typically is delivered. Under the proposed dates are still taxes with their own administration and system, those who prefer today’s dominant fee-for- enforcement problems. In any case, the urgent need service model of care will be able to keep it, if they for a reformed health care system should not be held are willing to pay any diff erence in price. However, hostage to the details of the tax mechanism to sup- most people with choices have proven happy to port it. Th e fi nancing step from Phase II to Phase III consider new, evolving, and improving delivery modes would not be large in the lives of most people, but the with more emphasis on maintaining health through coverage step would be very important in enhancing preventive care and healthy behavior, early intervention the health and fi nancial security of all Americans. against and sustained control of chronic diseases, and better use of contemporary digital technology and communications.

62 Th e health-insurance model presented here relies on incentives for individuals to choose both plans and providers that off er what those individuals judge to be the best combination of quality and price. Exposing the health-care sector to such competitive forces will create a new dynamic toward improvement. Without such an incentive, health-care delivery has trundled along essentially unchanged, and prices have grown much faster than average incomes in the economy – leaving growing numbers of people who cannot aff ord coverage at all. Before those unsustainable trends advance even further, at ever-mounting cost to reverse, the nation must change course. Command-and-control systems have a poor track record in modern economies; and health care is too complex to devolve all authority to the individual patient. Market-based universal health insurance, with individuals choosing the health plans and delivery systems that they deem best, shows great promise – much greater than any alternative.

63 64 Appendix A: CED’s 2002 Policy Statement – Has It Made a Difference for Health-Care Reform?

CED’s 2002 statement on health care contains many other states on risk-adjusted outcomes for cardiology sensible and important recommendations for business procedures.118 We need guidelines on best medical and government.117 For example, for employers: practices, and then information systems to measure adherence to the guidelines. Toward these ends, lead- 1. Demand transparent quality information and ing integrated delivery systems like Health Partners in adherence to best medical practices; use compara- Minnesota and its cooperating medical group practices tive performance information to select plans and had created the Institute for Clinical Systems Improve- providers; incorporate accountability for cost and ment; businesses have worked together in the Leapfrog quality into contract specifi cations. Group; Kaiser Permanente had created their Care 2. Off er wide, responsible health plan choices to Management Institute to defi ne practice guidelines employees in exchange for their greater fi nancial before 2002; the Veterans Health Administration had responsibility. Such plans would incorporate con- created a similar Quality Enhancement Research Ini- tribution policies that encourage workers to choose tiative. But aside from these examples, there has been effi cient, high-quality plans…help to establish, little progress. operate, and manage regional purchasing coopera- Th e availability of wide, responsible employee health- tives that off er aff ordable plans to small fi rms. plan choices is diffi cult to judge because it is not mea- For government: sured in regular surveys. Th e two most important sur- veys were done in 1997 and 2000. Th e earlier survey 1. Restructure Medicare on the model of the Federal found that the employers of 77 percent of employed in- Employee Health Benefi t Program (that is, a wide sured Americans did not off er a choice of carriers, and range of responsible choices). only 28 percent of establishments that off ered a choice 2. Cap the currently open-ended federal tax exclu- gave employees an incentive to make a cost-eff ective sion of employer contributions to promote cost choice by contributing a fi xed-dollar amount. Th is discipline and equity; this could also provide some leaves only about 6.4 percent (23 percent of 28 percent) 119 funding for policies to expand access. with both a choice and a fi xed-dollar contribution. Th e later survey found that fewer than 10 percent of 3. Provide vehicles, funding, and technical assistance Fortune 500 employees combined a choice of carrier to establish purchasing cooperatives for small and a fi xed-dollar contribution.120 employers. Th ere have been no subsequent surveys, and there is We have seen very little progress towards these recom- little evidence that this situation has improved. On the mendations. Transparent quality information based positive side, both Wells Fargo and Hewlett-Packard, on results or outcomes is diffi cult to come by, despite which previously off ered choices, have recently adopted some ongoing eff orts. Many opportunities have been a fi xed-dollar contribution for their employees. How- missed, such as extending to the whole nation the re- ever, these examples are practically the only indication search being done by the state of New York and a few of progress.121,a a Th e Henry J. Kaiser Family Foundation and Health Research and Educational Trust publish an annual Survey of Employer Health Benefi ts, which touches on the subject of employee choices. Unfortunately, they survey and report on “choice of plan,” meaning “plan designs.” Th eir survey would report that an employment group off ering one carrier, with three plan designs (for example, HMO, PPO, POS (Point of Service) or High Deduct- ible Health Plan) all providing insured access to the same networks of FFS providers, would be off ering three plans. But this “choice” is competition neither at the insurance-carrier level nor at the delivery-system level, and so does not bring about delivery-system competition. And even by that defective measure, the survey shows little change in the frequency of off ering a “choice of plan.”

65 Chapter One explains that employers that consider very-high-cost cases could help, though not without off ering choices are inhibited by concern over admin- causing its own problems.c Creating competition is a istrative costs, the possibility of adverse selection, and collective-action problem. One employer off ering re- insurance company preferences to be the sole carrier sponsible choices will not get the benefi t of a reformed for the group. Th e CED report recommended form- competitive delivery system. Concerted action by ing large multi-employer exchanges, like the California many employers is needed. If employers are unable to Public Employees’ Retirement System (CalPERS), to collaborate to create an eff ective competitive market, pool large numbers of employers and therefore create some public-policy response to the problem of soaring an attractive market for many carriers. Th at approach costs of insurance will be necessary. would require sustained collective action by employers. As to the recommended government action, the idea Unfortunately, employers fi nd it diffi cult, if not impos- of restructuring Medicare to work like the FEHBP sible, to organize collectively, because their interests has attracted some rhetorical support, but progress and priorities are so diverse: some are large, some are has been limited. Th e Congress did take an impor- small; some have foreign competition, some do not; tant step forward in the Medicare Prescription Drug, some are unionized (and most, but not all, unions de- Improvement and Modernization Act of 2003 (MMA) mand that employers subsidize more costly choices), by providing that Part D of Medicare would be or- some not; some have mostly high-paid employees, ganized through price-sensitive individual choice of while some have mostly low-paid workers (for whom prescription-drug insurance plans from among many health-insurance costs are a larger percentage of total alternatives. Th e new competitors in the Medicare compensation); some are concentrated in one or few Advantage program, such as regional PPOs and private locations, like universities, while others are scattered in fee-for-service plans, have added a competitive dynam- many small groups. Multiply this diversity by the myr- ic, but they will participate only so long as underlying iad views and understandings of what health care is all payment levels are attractive. Th e shift in the program about – plus the fear that some other employer would from administered-pricing to quasi-competitive-bid- increase the riskiness of the pool – and the diffi culty of ding by plans could create a new competitive force – collective action becomes understandable. limited by the retention of statutory pricing to deter- In the summer of 2006, the Pacifi c Business Group mine government payments. More important will be on Health announced that PacAdvantage, a voluntary any move toward quality-based payment for providers pooled-purchasing arrangement for small employers of and health-care organizations that rewards both ef- two to 50 workers, was closing because one of its insur- fi ciency and good outcomes. ance carriers was persistently losing money. If pooled- In 2005, the President’s Advisory Panel on Tax Re- purchasing arrangements are wholly voluntary, and form recommended capping the tax exclusion of em- without a strong incentive for a large representative ployer health-insurance contributions to induce cost- sample of employers to participate, a spiral of adverse consciousness. President Bush proposed it in his 2007 selection against the pool is almost inevitable. Only State of the Union message, but no action is pending.d strong incentives, such as access to tax exclusions, can Purchasing cooperatives for small employers are, for hold such pools together.b A system of reinsurance of the most part, closing rather than proliferating.e

b Th e problem may be mitigated, and possibly solved, by the use of a risk-adjustment procedure under which groups with predictably higher costs pay proportionately more, relieving employers of comparatively healthy employees of the burden of sharing in the costs of the more costly groups. Technology exists to do this. However, this would work against the ideal of broadening the risk pool and evening out costs and risks so that everyone could aff ord insurance. c Any reinsurance of high-cost cases must be carefully designed to provide incentives for insurers to control very high costs, and to avoid incentives artifi cially to categorize more-moderate risks as high cost so as to offl oad that expense onto the reinsurance program. d Th e Congress has not considered serious proposals to condition continued access to the tax exclusion on the off ering of choices and fi xed-dollar contributions, which might induce small employers to form or join pooled arrangements to achieve economies of scale. e Th ere is a successful broker-created multiple choice arrangement for small employers that off ers, in Southern California, a choice of six or eight delivery systems to employees of participating employers, called California Choice. It covers 170,000 lives and is growing. It is not entirely clear how this survives and prospers when PacAdvantage could not. Apparently, California Choice has stricter underwriting criteria.

66 Some recent changes have been in the wrong direc- And yet, there is the potential for a better health-care tion. For example, the emphasis on high deductibles, system at the same or lower cost. As was noted at the despite the best of intentions, could weaken primary outset, patients today are treated at considerable cost, care, disease prevention and disease management, but receive only about half of what best practice would thereby lessening the already insuffi cient market forces defi ne as appropriate care. U.S. health-care spending of competition.f is the highest in the world as a percentage of GDP, but U.S. health-care outcomes are far below the average Conclusion – suggesting strongly that better practice would yield better health and lower costs down the line. In the In short, CED proposed a private, voluntary path to- same vein, reputable studies have identifi ed excessive ward creating an eff ective market for competing health and inappropriate treatment and expense, suggesting plans and delivery systems. We remain confi dent that opportunities for savings that would have no cost in such ideas, if adopted widely and vigorously, could terms of health. Th us, our health-care system could work. However, there is little or no evidence that these deliver better care at low additional cost or even sav- ideas are being acted upon in a timely manner. It is ings – without the feared necessity of withholding ben- now not at all clear that constructive change to create efi cial care in the interest of cost. Th e nation should an eff ective market model will happen before national pursue greater effi ciency in the existing system before health expenditures reach 20 percent of GDP, fam- contemplating limits on care. ily premiums reach 40 percent of the earning power of the median household, and the number of uninsured reaches 60 million to 80 million. At that point, des- peration could break out, creating a fertile ground for simplistic “solutions” that do not work, or indeed do more harm than good.

f Chapter Two addresses the merits of the high-deductible approach in greater detail.

67 68 Appendix B: The Traditional Fee-for-Service-Indemnity Model of Health-Care Finance Is a Major Cause of Rising Costs

Th e growing number of uninsured Americans is truly Th e patients were using their own money and went troubling. Th is problem is surely driven in substantial without care they could not aff ord unless they were part by high and rising health expenditures and the poor enough to be considered charity cases. cost of health insurance. For years, health-care expen- Similarly, in those days, retailing began with the “gen- ditures have been growing two and a half percentage eral store.” Th ere was not a suffi cient range of goods points per year faster than incomes. If we could control to justify more than one store for many, or even most, cost growth, it surely would ease our coverage problem, of the geographic regions of the country. Competition at least somewhat. So we must ask the question: Why between stores was unheard of. are health-care costs growing so fast? Now, of course, the general store is a vague memory for Medical practice in the United States is dominated all but the most rural parts of the United States. It has by the fragmented, uncoordinated fee-for-service been overtaken by technological advancement in goods model of health-care organization and fi nance, based themselves, in organization, in transportation and on solo or small single-specialty group practices. It is distribution, in fi nancing, and in countless other areas. important to understand this model, its origins, and its Although this quaint and warmly remembered institu- consequences for health expenditure in this country. tion is gone, the vast majority of the population surely Th e dominance of this model is not the natural conse- believes that they are better off today with the fruits quence of market forces. Rather, it has been sustained of competition and the resulting innovation: greater by inertia and the absence of normal competitive forces effi ciency, lower prices (relative to typical incomes), and in the health-care market. It must be subjected to a wider array of up-to-date choices. competition from better-organized systems to serve informed, fi nancially responsible consumers. In those But even though the general store and most other limited instances when competition is at work today, economic institutions of that era are gone, rendered alternative health-care delivery systems perform much obsolete by organizational and technological improve- better. ments, fee-for-service solo-practice medicine persists – even though the nation’s health-care system is widely How the Fee-for-Service Model Works regarded to be in crisis. Why? Th e answer is largely inertia – because the existing institution was never Th e traditional fee-for-service, solo-practice model of challenged, as the general store was, by meaningful medical organization and fi nance is as old as medical competition from alternative forms of organization. science itself. In the early days of this country, when there was only one doctor for wide swaths of the No one can know what the results of greater competi- frontier, solo practice was inevitable. For years there- tion in health-care delivery would be – and of course, after, the body of medical knowledge was suffi ciently one can speak only of the results of competition at any narrow that there was no such thing as a “specialist;” one moment, because further innovation and change apart from diff erences of individual skill, one physi- go on endlessly. It is even possible that future innova- cian was interchangeable with any other. Again, solo tions would breathe new life into the FFS solo-practice practice was the inevitable result. Health insurance model. Th e one thing that we do know with certainty did not exist, and so people paid for each service when is that the cost of the status quo is rising unsustainably, they needed the doctor. Fees and costs were restrained threatening access and quality for every American. by the limits of patients’ willingness and ability to pay. We cannot continue on this path.

69 FFS solo-practice medicine came to be based on the partners, thus eliminating potential pressure from following principles:122 outside doctors who would want referrals. Th is puts multi-specialty group practices in business • “Free choice of doctor” at all times. Th at means confl ict with solo primary-care practitioners. that the insurer that pays the bills has no bargain- ing power with the doctor because it cannot infl u- Th is traditional FFS model maximizes autonomy and ence whether or not the patient goes to any par- economic benefi ts for physicians. Arguably, it is not ticular doctor. the best model, and probably not even a sustainable model, for our society. It does not meet the important • “Free choice of treatment,” that is, nobody “in- and legitimate need for aff ordable care and insurance. terferes” with the doctor’s treatment decisions and It has survived, and its performance has been taken as recommendations. Th is means that there is no the standard for the health-care system, in large part monitoring of compliance with established practice because of the lack of eff ective competition to test it guidelines, no utilization management, no quality and force it to improve. management and no peer review. Process, organi- zation and management innovations such as these After years of patients using their own money and go- have been the lifeblood of progress in virtually ing without care they could not aff ord, employment- every other industry in the developed economic based health insurance became widespread during and world. after World War II. Most health insurance was FFS by Blue Cross and Blue Shield (“the Blues”). Hospital • “Fee-for-service payment,” which means that the and physician associations created the Blues to assure doctor can always earn more by doing and pre- payment on terms acceptable to them. Th ere were scribing more treatments, and more-costly treat- agreed-upon fees, but providers sat on both sides of the ments, whether or not they signifi cantly benefi t bargaining table where the fees were determined.124 the patient’s health – a confl ict of interest for the doctor. Insurers set FFS indemnity payments for each par- ticular service or group of services that they would • “Direct doctor-patient negotiation of fees.” Th e provide to insured patients. Following FFS principles, patient is in a very weak position to bargain or there was no contract between doctors and insurers. shop because he or she depends on the good will of Doctors often charged more than the indemnity pay- the doctor and lacks information about the under- ments, but under pressure from employees who did lying medical science, what other doctors charge, not want to pay the diff erence, employers instructed how capable they are, or how many visits or pro- insurers to raise indemnity payments, and the indem- cedures they would take to solve a given problem. nity payments chased the fees. Under the community Insurers, on the other hand, have a great deal of rating that was then dominant, higher claims costs such information and could use it in the patient’s were distributed across all participants, and so no one interest, but they are not allowed to do so in the increased payment seemed to have any meaningful FFS model.a consequences. Employers often backed up indem- • “Solo (or small single-specialty group) practice.” nity insurance with “major medical insurance” that Th e idea of physician autonomy is deeply ingrained paid most of the patient’s out-of-pocket cost not paid in medical culture.123 In today’s world of com- by indemnity insurance. Insurance left patients with plex modern medicine, that idea is dysfunctional. little or no reason to care what services cost. Th e old Teamwork is essential, with other physicians and restraint of the patient’s ability and willingness to pay also with many allied health professionals. Doc- was removed or greatly attenuated by insurance. tors depend on other doctors for referrals. Within In the FFS model, the doctor decides what he or she a multi-specialty group practice, primary care wants to do and what he or she wants to charge, and doctors can refer patients to their own specialist

a Th is aspect of the model has been superseded by Medicare fees and by the wide-access PPO in the private sector.

70 the patient’s role is merely to pay and then seek reim- closely, however, the type of medical service pro- bursement from his health plan or employer. Th is vided is often found to be as strongly infl uenced is a model that leaves employers and employees with by subjective factors related to the attitudes of minimal control over the costs of health care – and the individual physicians as by science. Th ese sub- employees with minimal concern about the costs in the jective considerations, which I call collectively fi rst place. Now, as costs have soared, the FFS model the “practice style factor,” can play a decisive role has been strained to the breaking point. in determining what specifi c services are pro- vided a given patient as well as whether treat- Inappropriate Care and Variation in Practice ment occurs in the ambulatory or the inpatient Patterns setting. As a consequence, this style factor has profound implications for the patient and the Under FFS, providers are not held responsible for the payer of care. cost of care and face little economic restraint on fees. PPOs negotiate fees, but because they commonly of- For example, the practice style factor aff ects fer wide access – that is, practically every provider in whether patients with menopausal symptoms, town is in the network – the PPO has little bargain- with hypertrophy of the tonsil, with hyperpla- ing power. It cannot off er providers more volume in sia of the prostate, with mild angina, or with exchange for a better price. A doctor who keeps his or a host of other ailments receive conservative her patients in the hospital longer than other doctors, treatments in an ambulatory setting or un- for the same condition and case severity, is rewarded dergo a surgical operation in a hospital. It also with more money and the esteem of the hospital ad- aff ects whether patients with relatively minor ministration for generating more revenue. medical conditions such as bronchitis or gas- tro-enteritis, or who need minor surgical pro- Studies by the UCLA Medical School-RAND Cor- cedures such as cystoscopy, teeth extractions, poration team and by others have documented large sterilization, or breast biopsy receive their care amounts of inappropriate surgery and hospitalization, in a hospital or elsewhere. Th e practice style where “inappropriate” means the patient would have that favors inpatient treatment greatly aff ects been better off without it, cost not considered. Other the demand for hospital care and has serious studies found a great deal of “unnecessary surgery.”125 implications for eff orts to constrain costs. Th ere were and are very wide variations in medical Some of the diff erences in opinion arise be- practices from one community to another and even cause the necessary scientifi c information on among doctors in the same community. John Wen- outcomes is missing. For other conditions, the nberg, M.D., Professor of Medicine at Dartmouth practice style factor appears unrelated to scien- Medical School and director of Dartmouth’s Center tifi c controversies. Physicians in some hospital for the Clinical Evaluative Sciences, documented varia- markets practice medicine in ways that have tions of ten-fold and more.126 Doctors in some parts extremely adverse implications for the cost of of Vermont did ten or more times the per-child rate care, motivated perhaps by reasons of their of tonsillectomy as in others. Such variation suggests own or their patients’ convenience, or because doctors were following their own practice patterns, of individualistic interpretations of the require- perhaps doing what they were told in their training ments for “defensive medicine.” Whatever the programs years ago, rather than following up-to-date reason, it certainly is not because of adherence science. Wennberg’s fi ndings bear quotation at length. to medical standards based on clinical out- Most people view the medical care they receive come criteria or even on statistical norms based as a necessity provided by doctors who adhere on average performance. In some markets, to scientifi c norms based on previously tested a substantial proportion of hospitalizations and proven treatments. When the contents of are for cases that in other markets are usually the medical care “black box” are examined more treated outside the hospital. If more conserva- tive, ambulatory-oriented practice styles were

71 substituted – then substantial cost savings A study presented at a medical conference in and improvements in quality could be realized 2002 found that of 100 UAE patients at Chi- without fear that needed services were being cago’s Northwestern Memorial Hospital, 79 withheld.127 had learned about the procedure from a source other than a gynecologist. A survey by Yale Th ese fi ndings undercut the notion of “medical neces- University School of Medicine in 2003 found sity,” as judged by the individual doctor, and the notion that 13 of 21 UAE patients had learned about that there is a “standard of care.” Clearly, some people the procedure from the Internet. were getting more therapies or procedures than were benefi cial while others might be getting too few. Sci- “It’s sad,” says Juergen Eisermann, a gynecolo- entifi c evidence-based practice guidelines would help gist who is medical director of the South Flor- to control costs. Dr. Wennberg has continued this line ida Institute for Reproductive Medicine. “We of research and periodically publishes the Dartmouth do a disservice not to mention all the options.” Atlas of Health Care.128 Th e Dartmouth Atlas 1999 re- Some gynecologists blame the failure to inform ports that in 1996, radical prostatectomy for Medicare patients about UAE on the fact that gynecolo- benefi ciaries was performed 9.4 times as often in the gists generally don’t perform the procedure. hospital referral area with the most such procedures Instead, members of a specialty known as in- than in the referral area with the least. For carotid en- terventional radiology do UAE. When gyne- darterectomy, the ratio was 7.7.b cologists lose the chance to perform a hysterec- Scientifi c, evidence-based practice guidelines, produced tomy, they also lose the roughly $2000 fee the by teams of doctors and other experts, are clearly gynecologist might have earned. needed, as are procedures to monitor compliance. In For the many women for whom the UAE produces a view of the massive amounts of medical literature ap- better and more desired medical outcome, the more pearing every week, the individual doctor – unaided by costly hysterectomy is not “medically necessary.” some organized eff ort – cannot possibly keep up and also have time to see patients. A good example of a proliferation of unevaluated tech- nology in FFS is arthroscopic surgery for osteoarthritis Arguably and understandably, many doctors’ decisions of the knee, as documented in a 2002 New England and behavior are at least infl uenced by the fi nancial Journal of Medicine article reporting a clinical trial that incentives in FFS, as well as by traditions and training, compared arthroscopic surgery with a pretend or sham and by loyalty to the physician’s particular specialty. or “placebo” operation.130 Patients with osteoarthritis Th e Wall Street Journal recently reported an example of the knee were randomly assigned to and received in an article entitled, “Hysterectomy Alternative Goes “arthroscopic debridement” or “arthroscopic lavage” Unmentioned to Many Women.”129 (two frequent operations), or placebo (that is, pretend Hundreds of thousands of women go to gyne- or sham) surgery. Th e authors concluded that: “At cologists each year with a common condition no point did either of the intervention groups [that is, known as uterine fi broid tumors. When it’s those who got a real operation] report less pain or bet- severe, a majority of them get the same recom- ter function than the placebo group.” In other words, mendation: a hysterectomy, or removal of the this operation conferred no medical value. uterus. In recent years, a less invasive proce- But other research has shown that “Postoperative dure, known as uterine artery embolization thromboembolic events [blood clots] are serious com- or UAE, has been growing in popularity. Yet plications, and retrospective studies have reported an some patients, and even some gynecologists, incidence of 0.2 percent to 7 percent for clinically ap- say many gynecologists aren’t telling their pa- parent deep venous thrombosis (DVT) and pulmonary tients about the alternative. embolism (PE).”131 DVTs and pulmonary embolisms b Th ese fi gures are computed on an age-adjusted per-capita basis. Th e procedure counts are based on the area of residence of the benefi ciaries, not where the procedure was performed.

72 can lead to strokes, death, and heart damage, and to Error, Fraud and Abuse long and costly treatments in and out of hospital with Largely because FFS requires millions of individual anti-coagulation drugs. According to a report from the acts to be billed and paid for, improper billing be- Baylor College of Medicine: “In the United States, it is cause of fraud, carelessness, or errors is a huge prob- estimated that more than 650,000 arthroscopic debri- lem. Both governmental and private payers must sort dement or lavage procedures are performed each year, through millions of claims and separate the appropri- many of these for arthritis, at a cost of about $5,000 ate and legitimate from the inappropriate and false. each”132 – totaling $3.25 billion per year, not including Physician demands for prompt payment do not make the costs of treatment of the complications. As is often this task any easier. Th e insurance industry has had to the case with evaluation of surgical procedures, this innovate to do this job: perfection is not possible, and one was not without controversy. Th ere are reasonable reasonable approximations must be used. Otherwise, criticisms of the research design, but this reinforces transactions costs would soar even more than they the point that the procedure became widespread before have. proper evaluation.133 Th e Report on the Financial Statement Audit of the In this example as in the others, the FFS insurance Health Care Financing Administration for Fiscal Year model gives patients no guidance as to the best proce- 1996 by the Offi ce of the Inspector General of the dures and the least costly doctors, and little reason to Department of Health and Human Services esti- care. All the incentives lead to doing too much care, or mated that in that year, the Medicare Program made care of little or no marginal value. about $23.2 billion in improper payments; subse- Another important driver of cost infl ation in the FFS quent reports have indicated that such payments have model is that hospitals compete for doctors – because continued in somewhat reduced but still substantial doctors bring in paying patients – by off ering ameni- amounts.137 Th e main reasons the payments were ties such as low-cost convenient offi ce buildings next to judged to be improper were insuffi cient documenta- hospitals, and by buying the latest and best high-tech tion, no documentation, lack of medical necessity, equipment. Hospital recruiting leads to a “medical incorrect coding, and non-covered or unallowable ser- arms race” of proliferation of high-tech equipment, vices.138 As the Inspector General’s Report said: “Th e much of which is not used to full capacity. Underused Medicare program is inherently vulnerable to incorrect specialists and facilities can result in a lack of profi - provider billing practices.”139 Th e same could be said ciency – and thus, the proliferation of hospitals doing of all insurance under FFS. Malcolm Sparrow’s book, costly, complex and inherently risky procedures such as License to Steal: How Fraud Bleeds America’s Health open-heart surgery in volumes that are so low as to be Care System, provides many examples.140 Abuse that is both dangerous and uneconomic.134 particularly hard to detect is, for purely economic rea- sons, increasing the volume of services that confer no FFS Is Inadequate for Treating Chronic additional benefi t to the patient.141,142,143 Conditions Lack of Performance Tracking A recent estimate indicates that 83 percent of health- care spending is associated with people with chronic FFS has been very slow to adopt comprehensive lon- conditions, and that this share is rising.135 Th e FFS gitudinal records. Th us, doctors have no systematic model is particularly poorly adapted to this kind of way to follow their patients and track the outcomes of care. FFS is oriented to acute, episodic care. It pays diff erent procedures and treatments. Th ey follow their for doctor visits and procedures. Chronic care needs patients who want to come back and be seen, but have what the Institute of Medicine of the National Acad- little knowledge of the others who must be included emy of Sciences (IOM) calls “care based on continu- in any analysis of the quality of care or the effi cacy of ous healing relationships” usually performed by allied treatments. health professionals.136 FFS has a hard time paying for nurses to telephone patients to ask them about their weight and recommend changes in their medications.

73 74 Appendix C: Potential Alternative Delivery Systems

Th e broad outlines of our recommendation, even with plans is that some of their employees become over- several practical examples such as the state of Wis- whelmed when confronted with too many options. On consin, the University of California and the FEHB, one key dimension, however, it is likely that consum- leave important implementation questions. Some of ers will have to trade off price against choice of physi- the examples are public, and some are private. Which cian: plans that have limited integrated networks of mode should be chosen? If it is the private, University- providers will probably cost less than those that allow of-California-type model, why is it that this successful nearly unlimited selection. Th us, consumers would model has not spread on its own? What changes in have a choice between delegating the management of public policy would be needed to scale such a model to their health care to pay a lower price, versus accept- national implementation? Also, the private model is ing responsibility for that management in all of its based on employment. How could that approach be detail – or some combination in between. It would be implemented to achieve broader or even universal cov- important that consumers be off ered the option of a erage to attack the problem of the uninsured? But if free-choice fee-for-service plan – so that every person the public model should be chosen, what would be the who is satisfi ed with his or her health care could keep cost, and how would it be fi nanced?a what he or she had. However, in the interest of value for money, and in particular fi nancial savings, it is Many people fi nd it hard to imagine health-care likely that some consumers would choose health plans fi nancing and delivery systems other than the domi- with limitations on choice of provider that they would nant, uncoordinated “free choice” fee-for-service small not have accepted if they could not choose the limited practice system. Th is system is hard to change, and its group of physicians – if it had been imposed by their adherents fairly successfully fought off the “managed employers, and especially if that imposition did not in- care” revolution of the 1990s. To imagine how it might clude visible receipt of the attendant fi nancial savings. change, it is important fi rst to imagine an insurance world in which every individual or household has an One of the most important insights is that there is very annual, cost-conscious choice among alternative fi nanc- wide variation in practice patterns among physicians, ing and delivery systems in a model structured to make and the most cost-eff ective physicians often achieve sure their choice is informed and easy to make.b How the best outcomes by “doing it right the fi rst time.” A would things be diff erent if health insurers had to key step toward a quality cost-eff ective health plan is compete for members, not employers? selecting a limited set of providers who are themselves cost-eff ective, and committed to coordination and Experience shows that people would migrate to what teamwork. they perceive to be value for money – not necessarily the cheapest plan, but the plan that people believe the Although we cannot forecast which systems would best combination of price and all other attributes that prosper in a reformed, truly competitive market for they value. For such a system to work, the number of health plans, the following are likely candidates. choices must be manageable for typical consumers. Th e experience of employers with 401(K) retirement

a One plan along these lines has been introduced in Wisconsin by a bipartisan pair of legislators and can be seen at www.wisconsinhealthproject.org. b As noted earlier, this is a state of aff airs that exists, for example, for employees at the University of California and Stanford University, Wells Fargo Bank and Hewlett Packard, and Federal and California state employees, but otherwise only in a small minority of employment groups.

75 Tiered High-Performance Networks (THPN) eff ectiveness of the model was limited because it lacked Combined with Capitated Primary Care the data needed to identify the most effi cient doctors. Networks (CPCN) It is not hard to imagine how such a model could evolve Th e major health-insurance companies have been de- toward greater integration as the primary care doctors veloping extensive database analyses to identify qual- and the health plan could invite the specialists with the ity cost-eff ective doctors and to be able to separate best records of performance and cooperation to join them from doctors who are high cost and poor qual- their system. Eventually these models could become ity. Insurers usually fi nd several who are in the favor- more and more like multi-specialty group practices. able quadrant of the quality-and-effi ciency space, using total-cost-per-episode to measure effi ciency. Th e gen- Individual Practice Associations eral idea would then be to off er health plans, usually in a PPO format, that would require substantially higher In the 1970s, doctors in traditional practice in counties customer cost sharing if the customer goes to other that also had strong Prepaid Group Practices formed than the designated quality cost-eff ective doctors. As Individual Practice Associations (IPAs) through their mentioned earlier, there are data analysis issues, such county medical societies. Th e idea was to preserve as the accuracy of assigning every episode to one physi- the traditional model in a format that would allow the cian, and of correcting for innate diff erences among FFS doctors to off er the fi nancial equivalent of Prepaid the patients and the episodes. Also, there are concerns Group Practice while preserving their individual- or that employers might be reluctant to use plan designs small-practice style. Th e IPA would be paid capita- that include powerful incentives to make people change tion, but the doctors would be paid fee-for-service. doctors. Because this methodology is focused on spe- IPAs reconciled the diff erence by imposing manage- cialists, where most of the money goes, it ignores the ment controls on their physician members, and usu- important roles of primary care and prevention and ap- ally withholding payment of some 20 percent of fees propriateness of care. THPNs could end up with high until the end of the year, and then paying out what was volumes of preventable inappropriate episodes. Even if left if there was a fi nancial surplus. Many IPAs failed these episodes were handled effi ciently, costs per per- fi nancially in California in the 1990s, often because son might be high. they lacked the commitment of their participating doctors and because the fee-for-service incentives were Th e weaknesses of THPNs might be addressed by too strong. Many doctors considered IPAs to be “just pairing them with Capitated Primary Care Networks another insurance company.” An important weak- (CPCNs). Starting in the late 1970s, HMO of Penn- ness of the IPA was its lack of selectivity. It could not sylvania, later U.S. Healthcare, developed a network of trade volume for price or protect its surgeons from the selected primary care physicians who were committed surgeon surplus, or otherwise correct specialty im- to the concept of cost-effi cient medicine, who would balances because all the doctors in the county not in be paid on a per capita payment basis for all primary prepaid group practices belonged to the IPA. Another care services, and who would accept extensive quality signifi cant weakness was antitrust risk, as it was often measurement. In addition, they would share in the not clear what distinguished an IPA from a price-fi xing savings, if any, in a budgeted pool of money for special- agreement among doctors. ist services. Th is model grew rapidly and was very suc- cessful, enrolling more than one million members. It But the leading IPA in Northern California, Hill was eventually acquired by Aetna, which apparently no Physicians Medical Group, caring for nearly 400,000 longer uses it because it does not fi t well with Aetna’s members, has survived and prospered in an environ- “single-source” business model. But such a Capitated ment where there are strong multi-specialty medical Primary Care Network could build in the important group practices. Th ey contract with the major net- functions of health education, early detection, disease work HMOs on terms similar to those of the multi- management and management of referrals to cost- specialty group practices. Th ey have more than 3,000 eff ective doctors. And it could grow rapidly because physicians and other providers in more than 1,300 it uses doctors already established in practice. Th e practices. Th ey are developing an electronic medical records solution that will make comprehensive patient

76 records available to participating physicians. In 2005, • Comprehensive health-care services provided di- they paid out $26 million in performance bonuses for rectly or indirectly by the PGP; physicians. Th ey are deploying other electronic sys- • Per capita prepayment; tems to assist their physicians with appointment set- ting, patient eligibility, claims status, electronic claims • Accountability for the quality and cost of the care processing, etc. Th ey have the benefi t of strong and that is delivered; and eff ective management. • A relationship (usually, but not necessarily, mutu- Tufts Health Plan in Massachusetts serves over ally exclusive) between the delivery system and the 560,000 members. It works through hospitals and insurance entity. hospital staff s. To align incentives and to compensate hospitals for revenue loss through reduced hospitaliza- PGPs now cover roughly 12 million people. Th e main tion, the hospitals receive a portion of the savings from examples of PGPs are Kaiser Permanente, now operat- those reduced hospitalizations, preserving what would ing in nine states and the District of Columbia; Group have been their small “profi t” and fi xed overhead por- Health Cooperative of Puget Sound; Health Partners tion, but not incurring the signifi cant variable costs. in Minnesota; and Health Insurance Plan (HIP) of New York. Harvard Community Health Plan in Bos- IPAs could have a strong future if they could attract ton was a PGP until it merged with Pilgrim to become the loyalty, commitment and responsible participation a mixed group/IPA model. of physicians, if they could select physicians to address specialty balance and teamwork, and if they could Properties and attributes of Prepaid Group Practice achieve a high degree of virtual integration through include the following: Physicians are paid salaries, shared electronic medical records and electronic sys- depending on their specialties and market conditions, tems for administration, such as for appointments and and usually substantial bonuses for measured patient payments. Th ey would need to move more toward im- satisfaction, indicators of quality and teamwork. Th is proving effi ciency through better integration. facilitates incentives alignment. Th e culture empha- sizes teamwork and shared responsibility for enrolled Prepaid Group Practices patients. PGPs emphasize primary care, disease prevention, early detection and treatment of disease, A prepaid group practice (PGP) is an integrated entity and chronic disease management. Th e model facili- that includes both a health-care delivery system (doc- tates development of the infrastructure for chronic tors, other clinicians, laboratories, clinics, and hos- disease management, and also provides a smooth way pitals) and an insurance function (fi nancing arrange- of transferring savings from the inpatient sector to the ments, benefi t plans, marketing, and customer service ambulatory-care sector that prevents the need for hos- systems) “under one roof.” Critical components of the pitalization by superior care for patients with ambu- PGP include the following: latory-sensitive diagnoses. PGPs feature longitudinal comprehensive medical records and analysis of practice • A multi-specialty group practice – that is, a group patterns and outcomes, to determine what works best of clinicians, including primary care generalists, in practice. Prepaid group practices are among the non-physician providers such as nurse practitio- leaders in adopting health information technology. ners, and specialist physicians, sharing fi nances, facilities, equipment, and responsibility for all In the RAND Health Insurance Experiment, a ran- enrolled members and committed to the team domized controlled trial, Group Health Cooperative practice of medicine; in Seattle delivered care of equal quality for 28 percent fewer resources than fee-for-service in Seattle. And • Any hospitals or other facilities owned by or affi li- they accomplished this in the absence of competition ated with the multi-specialty group practice; in kind from similar delivery systems and, for the most • A voluntarily enrolled population that contracts part, premium-price-sensitive customers. with the PGP through a sponsor (employer or public program) or as individuals;

77 Large Multi-Specialty Group Practices Evolving rapidly, and that growth could trigger innovation on Toward PGP the part of all other providers. Should the market and consumer choices lean in that Th ese innovations could move much more quickly if direction, the 175 large (over 100 physicians) multi- their access to customers were not fi ltered through specialty group practices now existing in the United employers. Numerous other promising ideas sur- States could evolve toward larger integrated systems faced and were tried in the late 1980s and early 1990s by having a portion of the practice prepaid. In 2005, that might be tried again in more favorable market these practices included 81,600 physicians. Th ough conditions. higher concentrations of these entities exist on the Pacifi c Coast, upper Midwest, Florida and New York, Roles of Academic Health Centers at least one exists in all but three states. Clinics from Boston, New Hampshire and Vermont could reach Leaders of academic health centers (AHCs) have often out to serve people in Maine, for example. Many of felt threatened by the prospect of competition and these are quite famous, including the Mayo Clinic; the have opposed creating a truly competitive health-care Ochsner Clinic; the Leahy Clinic; the Fallon Clinic; economy. What would be their roles in a model of the Marshfi eld Clinic; the Geisinger Clinic; Scott and market-based universal health insurance? Here are White; Virginia Mason; Henry Ford Health System; some possibilities. and many more. Many of these have their own affi li- Of course, their unique roles would be teaching and ated health plans now, although that activity has been research. Th e products of these services are public receding in the face of unfavorable market conditions. goods, which are and must be subsidized at their Others have had their own health plans in the past, appropriate value by government. Academic health and some, such as Leahy, have teamed up with a Blue centers now often provide considerable care to the Cross or Blue Shield carrier to produce a joint venture uninsured poor, to some extent subsidized by Dispro- product when they thought market conditions were portionate Share payments. With universal health receptive. All could be marketed through network- insurance, the need for these payments would be model carrier HMOs like Pacifi Care and Health Net greatly reduced but not eliminated. – a move more plans could off er without major start-up costs. Some AHCs would choose to create comprehensive care programs based on per-capita prepayment to com- If a model of universal health insurance based on com- pete in the general market for health insurance, though petition to serve cost-conscious consumers were en- such plans usually would not be their core competence. acted, most or all of these group practices, and perhaps Probably all AHCs would compete for regional refer- some smaller ones as well, would fi nd it in their eco- rals for complex care from the region’s suppliers of nomic interest to create their own health plans again, comprehensive care, as they do today for organ trans- or team up with established carriers to create joint-ven- plants, neonatology, and “quarternary care” in the grey ture partnerships for “private-label products” (like the zone between ordinary care and research – such as Blue Cross Leahy health plan). One main reason for heart surgery in utero. Th ese eff orts logically would this is that the per capita prepayment that comes with be fi nanced by negotiated global condition-based pay- having their own health plans facilitates realization ments per case. of many effi ciencies not available in FFS, such as the smooth transfer of resources from the inpatient sector And fi nally, AHCs would compete in the market for to outpatient disease management programs (because “destination medicine” in which patients in need of the disease management programs reduce the need for their care will travel even great distances to receive it, hospitalizations). It also reduces the need to engage as in the case of the Mayo Clinic. Th ese treatments in fee-for-service billing and collection. Th ese cost might be on a fee-for-service basis, or paid for by nego- reductions would not be accompanied by reductions in tiated global condition-based payments. revenue as they usually are in FFS. In the market con- ditions hypothesized here, these entities could grow

78 Appendix D: Management of Universal Health Insurance by the “Health Fed”

Th e proposed system would be managed by the Also, the basic benefi t package for medical care services “Health Fed” under broad guidelines written by the must be suffi ciently comprehensive that it will not leave Congress. Th e Health Fed would insulate the details a market for supplemental insurance products that of the health care system from narrow short-term po- further insure the same services. Medicare for many litical concerns and would facilitate continuing policy years has encouraged a large market for supplemental adjustments that would need to move more quickly and policies, thereby adding both complexity and cost, and fl exibly than the legislative process. implicitly and inadvertently forcing Medicare to sub- sidize those supplemental insurance policies. People Reconciling the Benefi t Package, the Prices who have supplemental policies use signifi cantly more of the Low-Priced Plans, and the Government Medicare services than similar people who do not, Tax-Financed Fixed-Dollar Contributions because the supplemental policies buy out the coinsur- ance and deductibles they otherwise would have to pay. Th e benefi t package (that is, the schedule of what is covered by insurance, on what terms, and including It is desirable to have the government’s fi xed-dollar pre- what rates of patient co-payments, coinsurance and mium payment to individuals coincide with the prices deductibles), the resulting prices of the low-priced of the low-priced plans in each district, so that every- plans in each district, and the government’s fi xed-dol- one can have free access to the low-priced plan, and lar payment to each individual or household to assist therefore no fi nancial barrier to enrollment. A higher with purchase of health insurance, will not necessarily fi xed-dollar payment would destroy the incentive of coincide, being themselves the results of quite diff erent plans to off er lower prices. A lower payment would processes. leave some amount to be paid by consumers, likely causing some not to enroll. Th e reduced “take-up rate” Th e broad outline of the benefi t package should emerge in turn can lead to additional administrative costs (see from a political process that produces guidelines from below). A payment of 100 percent of the low-priced the Congress, with more detailed decisions by the plan premium, at least for an individual policy, is made Health Fed Board to insulate the details of benefi t de- at the University of California and Stanford, and for sign from politics. Th e benefi t package should be rea- state employees in Wisconsin. Th e Federal Govern- sonably comprehensive to encourage access to care for ment bases its contribution on a percentage of the aver- early detection, screening for chronic conditions and age of the premiums of the largest plans in the system. disease management. Importantly, the great major- Th e state of California now contributes fi xed-dollar ity of health spending is concentrated in relatively few amounts that are based on a historical path with an- high cost cases, and very little is actually spent on un- nual percentage adjustments, generally below the price necessary primary care visits. Well-organized systems of the low-priced plan. can make that even lower by using paramedical person- nel and coaching patients on appropriate use of physi- If the policy is to set the payment exactly at the price of cian and emergency room visits. Th us, the scope for the low priced plan, with the contribution determined premium reduction by reducing benefi ts and increasing after the bids are in, the model would be subject to cost sharing is very limited.144 An important contribu- some volatility, as some competitors might submit un- tion of primary care is early detection of potentially sustainably low bids in an attempt to buy market share. serious acute conditions (appendicitis, pneumonia) and Plan administrators might believe that the choice of a chronic conditions, and managing them appropriately plan is “sticky,” once individuals began working with to prevent them from leading to hospitalization. their doctors, and so might set a low premium price at

79 fi rst but assume that they could raise premiums later cost-unconscious and gave providers strong incentives without losing enrollees. For this reason, the state of to provide more services. Congress has watched each Wisconsin Department of Employee Trust Funds has year as patients and providers have increased the use of imposed an alternative rule. Plans are grouped into services at a rate greater than the growth of total rev- tiers by their quoted premiums. Tier I includes the enues, and in many years has done little to change the lowest-priced plans, and employees who choose a Tier I course of spending, and in few years has done enough plan will have the premium fully paid by the State. As to make any lasting impact. So it is not possible to well as greater stability, this approach tends to spread make uncontrollable expenditures easily controllable the load of caring for people with low incomes among right away. Moreover, recall that the system being rec- several plans. People who choose higher-priced plans ommended here would give all consumers incentives to are expected to pay the diff erence between the cost of choose economically, and would allow competition to Tier I and the higher-priced tier or plan. It is desirable force alignment of provider incentives with the needs to preserve a model in which a health plan can always and wants of consumers for aff ordable care. attract more members by lowering its premium, so If premium growth exceeds growth in available or es- people who choose plans priced below the Tier I aver- timated resources, the government might continue to age should be allowed to keep the diff erence (in cash, pay its fi xed-dollar contributions out of general rev- or in their health spending accounts, if any). enues at the increased amount needed to keep up with Th e prices of health plans would be determined by premium growth. Th ere might also be pre-planned competition to serve premium-sensitive customers. policy changes (spending or taxes) to accommodate the Th e experience in employment groups suggests that shortfall. Th e Health Fed would be required to ana- premium-price-sensitive consumers migrate to the low- lyze the causes of the problem and present to Congress priced plans, so the competition is likely to produce options and recommendations which might include strong incentives for health plans to achieve effi ciencies stepped up antitrust action or other government ac- and reduce prices. tivities, trimming the package of covered benefi ts, or raising the relevant tax rates. If Congress were not to A plausible way of determining the taxpayer-supported act in a timely manner, some default action could be fi xed-dollar payment would start with actuaries study- predetermined. (One such option could be to raise ing the distribution of actual premiums, estimating consumer cost sharing amounts to the extent needed to what a comparatively effi cient plan would cost, and keep the program solvent. In all cases of increased cost then adjusting the estimate regionally using indices sharing, there would need to be exemptions for people of input costs in each region (similar to what is done with low incomes.) for the Medicare Prospective Payment System for Hospitals). Th en, if plans bid premiums below the Managing Wide Regional Variations in Price- fi xed-dollar payment, and the Health Fed determines Adjusted and Disease-Adjusted per Capita that they are realistic and sustainable, individuals and Spending households choosing such plans would be allowed to keep the diff erence in cash or in their health spending Dr. John Wennberg and his Dartmouth colleagues accounts (if any), to give the plans incentives to off er have identifi ed very wide regional variations in price- lower prices. If the recipients cannot pocket the benefi t and disease-adjusted per capita spending. Medicare’s from choosing plans with lower premiums, plans will uncoordinated fee-for-service reimbursement encour- simply not charge lower premiums, and competition ages such variations and has no built-in incentive or will not drive prices down. management system to correct them. On the other hand, if, as widely feared, premiums A reasonable goal is to work toward equalization in grow faster than the tax revenues supporting the aggregate per capita spending, adjusted for prices consumers’ premium credits, a process must be de- and epidemiology (that is, adjusted for age, sex, and fi ned for dealing with the problem. For background, diagnosis, and for regional costs of living). A poor in 1965, Congress created open-ended entitlements outcome would be to tolerate the wide variations in in Medicare and Medicaid, which made consumers adjusted per-capita spending not justifi ed by variations

80 in prevalence of illness. Th at would be inequitable and government would pay an amount equal to the price of wasteful. the low-priced plan (or a “Tier I” plan), and unclaimed amounts could be paid to the insurer to which the un- If the premiums of the low-priced plans in a high-cost insured person is assigned. If a person chooses a plan district exceed the national standard, the Health Fed priced higher than Tier I and then fails to make pre- could, under guidelines created by Congress, pay the mium payments, after an appropriate process, the per- price of the low-priced Tier I plans in the initial year, son’s enrollment could be terminated and the person but then institute a 10-year phase out plan in which, could be assigned randomly to a Tier I plan in which by year 10, the fi xed-dollar contributions would be no further premium payment is required. at the adjusted national average. Each year that the premiums of the low-priced Tier I plans exceeded the An analogous solution being developed for a similar standard, the Health Fed could increase consumer MB-UHI model, the Wisconsin Health Plan, would cost sharing to bring the premiums back to target. be to assign uninsured people who show up at a provid- Alternatively, the Health Fed would be charged with er in need of medical care, randomly, to one of the Tier investigating the causes of higher regional costs, and I plans (that is, the lowest-cost plans, which they could could make specifi c recommendations to the Congress have for no out-of-pocket premium cost). Th at plan and to regional providers, in a manner similar to that would be paid all the unused back fi xed-dollar pay- followed by the Medicare Payment Advisory Commis- ments that it would have received if the person had en- sion. Dr. Wennberg’s research could be used to put a rolled on time. No one to whom this happens should public spotlight on egregious overuse of services. For be able to complain if the policy was clearly articulated example, the Health Fed (or the Institute for Medical in advance. (In the Wisconsin Health Plan, as in our Outcomes and Technology Assessment) might com- proposed program, all Tier I plans are “free.”145) mission studies on the prevalence of inappropriate or Without such a fi nancing plan, failure to enroll could avoidable hospitalizations, or other indicators of poor be more problematic. A second approach would be quality or overuse of services. simply to create a default insurance plan into which However, it is very likely that competition in high- everyone without coverage is enrolled. It could, by cost areas will work to eliminate wasteful overuse and design, be cheaper than the lowest-price plan by having to bring the health plan premiums down to effi cient higher cost sharing. However, such cost sharing might levels. not be appropriate for people with low incomes. A third approach would recognize that state and local Managing the Problems Created by the Failure government public provider systems of last resort (or of Eligible Persons to Enroll in a Health Plan “safety net providers”) have always been an important Despite good outreach eff orts, it is likely that some part of our health-care delivery system. Public sub- signifi cant number of people will fail to enroll in a sidies should be made available to strengthen these health plan. For one thing, some people simply will not systems, particularly to strengthen their capabilities in act until they are sick. Others may feel that their life primary care, disease prevention and disease manage- styles do not fi t in with enrolling in a health plan and ment. In eff ect, such systems, under state leadership carrying a card. What can or should be done about and with federal help, should evolve into comprehen- that? Th ere are several approaches. Th e Health Fed sive care organizations, as some have done already. might run experiments and demonstration projects Th en when eligible persons fail to enroll in a health with diff erent strategies. To a signifi cant degree, the plan, the default could be that they are enrolled in the best solutions will depend on the character, incomes public system, and the fi xed-dollar contributions to and life styles of those who fail to enroll, and will also which they would have been entitled are directed to the depend on the fi nancing mechanism chosen for the public system.146 program. Alternatively, some have suggested an individual man- In the fi rst instance, such problems are likely to date, which has gained popularity recently. It is a com- be moderate in the plan proposed here because ponent of the new Massachusetts Health Plan, and

81 Governor Schwarzenegger has included an individual with an insurer (for example, by telephone or website) mandate in his proposal for universal coverage in Cali- who is not allowed to refuse because of the open fornia. Th e key problem with the individual mandate, enrollment requirement. of course, is enforcement. California has mandatory If an individual in the Netherlands is enrolled but does auto insurance, but many people go without it. What not pay the premium, the insurer is legally allowed to do we do with people who have not purchased insur- cancel the contract within a reasonable period of time ance? One approach is to require them to make an after having sent a warning letter. Th e open enroll- extra payment on their income tax return. But many ment requirement is a problem for the insurers. Th e of the people most likely to go without insurance are insurer who has cancelled the contract is not obliged to not liable for income taxes. In Massachusetts, the accept this person in the next fi ve years, but all other mandate is conditioned on the availability of aff ord- insurers are not allowed to reject the expelled person. able insurance, and there has been some trouble fi nd- If the person enrolls with another insurer and again ing insurance that meets the defi nition of “aff ordable” does not pay the premium, the second insurer may without resorting to deductibles that are unreasonably cancel the contract after some time. And the person high for low-income persons. Nationally, only some 82 might go to a third insurer, etc. So the insurers fear percent of employees off ered health insurance by their a “merry-go-round,” when an individual would pay employers actually take the off er. Of course, in the premiums only when actually in need of care (which, of model we are proposing, in which fi xed-dollar contri- course, defeats the purpose of insurance). Th e insurers butions would approximate the price of the low-priced agreed not to cancel the insurance contract of default- plan, insurance would be aff ordable for everyone. And ers during a period of 18 months that ended July 1, if the contributions were fi nanced by broad-based 2007. Th ey are now negotiating with government over taxes, there would be no need for an enforcement who should bear the loss of forgone premiums. Pre- mechanism. liminary estimates are that the number of uninsured Th e Dutch have mandatory universal health insurance among those who are obliged to purchase insurance is based on regulated competition in the private sector, 1.1 percent. Th e number of persons who illegally stay with web-based enrollment processes, and also public in the Netherlands (and most likely are uninsured) is subsidies for low-income people. What happens if between 0.5 percent and 1.1 percent. Th e number of someone shows up at a hospital uninsured? In the fi rst defaulters (“no premium paid for at least 6 months”) is instance, the person is liable for his medical bills. If around 2 percent.147 someone does not purchase insurance, this person is But again, in a system of fi xed-dollar payments that liable to a penalty of 130 percent of the premium over are large enough to purchase a comprehensive low-cost the period of not being insured, with a maximum of 5 plan, such draconian measures should prove unneces- years. Th e penalty has to be paid to the new insurer, sary. Th ose who fail to enroll when fi rst eligible should who has to transfer this money to the government. If be able to join a low-priced plan later with no adverse an uninsured person makes use of health care facilities, consequences to the health-care fi nancing system. the person is liable for his medical bills. Alternatively, the person can, before getting the treatment, enroll

82 Appendix E: Functions of the Institute for Medical Outcomes and Technology Assessment (IMOTA)

IMOTA might fund clinical trials, but more often would assemble information from the published litera- ture and unpublished data pertinent to its evaluations. IMOTA might commission studies, typically to uni- versities and other nonprofi t contractors; but over time, full-time staff should perform a growing portion of its work. IMOTA would need to prioritize among com- peting objectives. For example, IMOTA would need to anticipate the most likely improvement in outcomes. It would have to decide how to prioritize among treat- ment variations that had little impact on costs and large impacts on clinical outcomes, and variations with large cost impacts but little clinical diff erence. Its eval- uations should be comprehensive, systematic, credible, and widely disseminated in accessible forms. In addition to prioritizing, IMOTA should make sub- jective judgments needed for comparative eff ectiveness analysis. Here are three examples of these issues: • How should evidence from diff erent types of data be addressed? For example, researchers and stake- holders will need assistance in assessing compara- tive eff ectiveness when evidence for one treatment (a drug) comes from a randomized trial and evi- dence for an alternative treatment (a device) comes from registries. • How should diff erential impacts on morbidity and mortality be addressed? How should stakeholders compare eff ectiveness for a treatment that extends life, but with greatly diminished quality, against a treatment that improves quality of life without extending it? • How should treatments with diff erential impacts over time be addressed?

83 Memoranda of Comment, Reservation or Dissent

Page 27, Harold M. Williams Delivery issues are at the heart of the health-care debate. Regina Herzlinger, a Harvard business school While I prefer our plan, I am not convinced that professor, has put forth strong and well researched government-run single-payer health systems are analysis of changes in the delivery system that are inherently less effi cient than market-oriented health needed to bring effi ciency into the health-care arena. systems. While a government-run single-payer system Th is CED report fundamentally does not address may not be compatible with our culture and ideology, the core issues of changes in the health-care delivery a market-oriented health system that doesn’t provide system. access to 45 million people is not compatible with our culture or societal values either. Much of what Th ere are two fundamental changes that the program we recommend could be implemented as well under a proposes. First, using a broad based federal tax rev- single-payer system. enue to fund health care through insurance credits is proposed. Second, creating insurance pools that make Studies show that Americans are not healthier nor are access to insurance universally available is suggested. they living longer than people in industrialized nations that spend much less per capita than we do. Despite Without fundamental delivery system changes, the having the most costly system in the world, the United sustainability of the program is in question. In ad- States consistently underperforms on most dimensions dition, there are serious questions about the Federal of performance relative to other industrialized coun- Employee Health Benefi ts Program as it is organized. tries that have government-run universal health plans. Th e decision to remove employer fi nancing is attractive and would make our health-care program more similar In health, our country rates 33rd and 32nd in the world to other nations’ health-care-program fi nancing. Th is respectively for longevity of males and females and 40th specifi c proposal clearly is a step in the right direction. in child mortality. Measured in terms of purchasing power, we spend nearly two-and-a-half times as much Th e issue of universal availability is fundamentally per capita as the United Kingdom, almost twice as an issue of risk management. Without fundamental much per capita as Canadians and Germans and half changes in the underlying delivery system, the pricing again more than the Swiss even though both Germany of these pools will become an issue. Th e risks underly- and Switzerland have much older populations. ing an insurance pool, no matter how big, determine the costs. Th e proposal, as noted above, does not Page 42, Michael Chesser address that fundamental issue. While this proposal purports to make fundamental It is recommended that this program be disapproved. changes in the health care delivery system, the primary If the analysis could more concretely address the proposals are related to the fi nancing of the program. issues in the delivery system, then the fi nancing and Th e proposal does not show a clear set of changes that universal-coverage provisions could be very attractive. would lead to fundamental change in the health-care delivery system. Page 42, David R. Nachbar Th e report does an excellent job of noting that the John Adams wrote in 1770, “Facts are stubborn fragmentation in the current system of providers and things.” While few issues draw as much passion as fee-for-service based programs are a core issue. To the nation’s health-care problem, the stubborn facts change this, as noted, the practice of medicine needs to remain. As this report shows, we have crossed the line change focus from medical specialty to the patient. Yet from having hope that the system will remedy itself to in none of the proposals is there a concrete migration the reality of a problem that needs a cure. from the existing system to the proposed system. Th e issues of monopolies in rural areas are not addressed, Th e number of uninsured Americans, now over 46 yet the report indicates that this is one of the problem million, is increasing. Th e costs of insurance are vastly areas. outstripping the rate of growth of American household

84 Memoranda of Comment, Reservation or Dissent incomes. Faced with the known needs of feeding the Moving forward will take hard work and most im- family, putting gas in the tank, providing a roof over portantly, political courage. Such courage is needed the head or buying insurance against unknown health to oppose forces that defend things as they are and risks, Americans are paying known expenses. Insur- scare away change. Two hundred years after Adams, ance can wait. American households have crossed the another great American, John Wayne said, “Courage is line. being scared to death – but saddling up anyway.” We have crossed the line and its time to saddle up. It is unclear how long American businesses can af- ford our current system. As the report indicates, the Page 42, Ian D. Spatz number of business off ering health benefi ts fell nine percent in a recent seven year period. While other “Quality, Aff ordable Health Care for All: Moving Be- countries have made health care coverage statutory, yond the Employer-Based Health-Insurance System” the US has relied on American industry, embedding carefully describes many of the problems of current health insurance into the costs of goods. Th is is a health-care delivery in America and accurately pin- strong blow to our nation’s competitiveness. American points areas of needed change. Chapter Four captures businesses have crossed the line. the necessary elements for creating a consumer-choice- driven, universal health-insurance system – competi- Th is issue ignores state lines and knows no community tive insurance markets and exchanges; broadly fi nanced border. Th e invisible uninsured become visible in our subsidies for low-income Americans, and reorganized emergency rooms and public-health facilities. Na- delivery systems focused on quality and effi ciency. Th e tional health expenses are 16 percent of the GDP and report also argues persuasively that government-run the Baby Boom generation has just started to retire. reform proposals would not achieve desired goals. American communities have crossed the line. Yet, despite the report’s cogent criticisms of employer- To adequately address this issue, I believe that three based insurance (EBI), it remains the most common criteria must be met: way of providing health insurance in the U.S. today • Th ere must be coverage for all Americans, ensur- and for the foreseeable future. Th e vast majority of the ing that no patient is left behind. non-elderly insured get their coverage through their employers or through employed family members. • Market forces must be unleashed to counter the upward drift of costs. Contrary to what some may believe, the evidence does not support the view that EBI is disappearing any time • Th e plan must be simple and easy to understand. soon. According to the 2006 Kaiser/HRET Employer Th is proposal comes close to meeting those criteria Health Benefi ts Surveya, while the percentage of work- and the details need to be worked out in the legislative ers covered by EBI has declined somewhat in recent process. years, that percentage is just three percentage points lower in 2006 compared to 1999 (59 to 62 percent). I also support the proposal for its call to action. Nearly all large fi rms (with more than 200 employees) Health care has been a subject of conversation since off er EBI (98 percent) and they employ the vast major- Th eodore Roosevelt. We need to act not only because ity of U.S. workers. of the pain infl icted on citizens and communities but also because we believe, in the words of Hippocrates, Further, just six percent of surveyed fi rms re- the founder of medical philosophy, that “health is the ported that they were very or somewhat likely to drop greatest of human blessings” and that it is inconsistent with our country’s standing as a strong, self-suffi cient a Henry J. Kaiser Family Foundation and the Health Research and Ed- nation, that this problem should exist for another day. ucational Trust, Employer Health Benefi ts 2006 Annual Survey (Menlo Park, CA: Henry J. Kaiser Family Foundation; Chicago: Health Re- search and Educational Trust, 2006).

85 Memoranda of Comment, Reservation or Dissent coverage and, among large fi rms, just two percent said their income. Americans who have coverage are by and they might drop coverage. large satisfi ed with their own care and coverage and fear change more than the status quo. Th e 47 million With the vast majority of those without insurance and growing population without health care plus those either employed or living in households with those who fear that the insurance they have may become who are employed, with the right policies – including unaff ordable are not an eff ective lobbying group. many recommended in the report – the workplace can provide a forum for expanding access to aff ordable Much responsibility must rest on employers. Strug- coverage. gling to contain the spiraling costs of health care and remain competitive internationally can provide strong Th is context suggests that the report’s recommenda- leadership for fundamental change. tion to build a new health-care system to replace the fundamental role of employers is unnecessary. Worse, Even assuming it is ultimately successfully implement- it is politically out of tune. Th e leading eff orts for ed, it will take at least a decade and probably longer systematic reform at the state level today build on, not before we have anything resembling universal coverage. replace, the current system of EBI. Notably, the Mas- Th is is unacceptable. Our nation is facing a crisis that sachusetts plan, adopted on a bipartisan basis, seeks to requires immediate attention. Th ere are some steps we strengthen the ability and willingness of fi rms to off er can take now that are not inconsistent with the plan we EBI and the ability of employees to enroll. Similarly, are proposing. the California proposals make EBI the building block In the interim, insurance companies could be autho- of reform. Th ese plans and others under consideration rized to off er coverage nationally and be required at the state level are now sparking signifi cant national to cover everyone with no exclusion for pre-existing interest including from Presidential candidates of both conditions. parties. Th e states should be encouraged to continue to explore Fundamentally, the health reform the United States their own solutions to eff ective universal health care so needs must be a political solution as well as a thought- we can all learn from their experience. ful policy solution. Th e CED report’s recommenda- tions to phase out the role of employers in EBI are We should be strongly advocating the reauthorization inconsistent with a promising, growing consensus for and expansion of the State Children’s Health Insur- change. Th erefore, with great respect for the report’s ance Program (SCHIP) – as the report recommends. authors and contributors, I must dissent. Th e least we can do now is to provide a safety net under our children today who do not otherwise have Page 53, Harold M. Williams access to health care, thereby assuring preventive care and reducing future health-care costs. While we are Th e plan we are proposing, if successfully implement- struggling with fi xing the system, at least this genera- ed, is one I strongly support. However, all the interests tion could count on realistic access to health care. that have resisted the past eff orts to reform the system Hopefully, compassion and humanity can prevail over are alive and well and vested in the status quo. Insur- ideology. ers and providers resist any eff ort that might threaten their central role and profi tability, and practitioners worry that change could impact how they practice and

86 Glossary

Access: A patient’s ability to ob- errors, and broaden access to eff ec- Benefi ciaries: Persons who receive tain medical care, determined by tive services. health care benefi ts that are paid factors such as the availability of for by a third-party fi scal interme- Allied health personnel: Specially medical services, their acceptabil- diary, such as Medicare, Medicaid, trained and licensed (when neces- ity to the patient, the location of HMOs, indemnity insurance com- sary) health workers other than health-care facilities, transporta- panies, etc. physicians, dentists, optometrists, tion, hours of operation, and the chiropractors, podiatrists, and Benefi t package: A defi ned array cost of care. nurses, who perform tasks which of specifi c services or benefi ts that Acute disease: Illnesses or health must otherwise be performed by a an HMO or insurer is obligated to problems that are of a short-term physician. provide under terms of its con- or episodic nature, from which the tracts with subscriber groups or Ambulatory care: All types of patient is expected to return to his individuals. health services which are provided or her normal or previous level of on an outpatient basis, in contrast Buyers Health Care Action activity. to services provided in the home Group (BHCAG): A coalition Adverse selection: A character- or to persons who are inpatients. of 26 self-insured employers in istic of a health plan when a dis- While many inpatients may be Minnesota which emphasizes care proportionately high percentage of ambulatory, the term ambulatory quality and cost eff ectiveness in enrollees are more likely to utilize care usually implies that the patient its program. Its overall mission is health services (and fi le claims for must travel to a location to receive to stimulate reform of the health reimbursement) because of ab- services which do not require an care system by building a program normally high health risks, such overnight stay. founded on four principles: 1) as when a high number of AIDS increased quality; 2) increased pro- Ambulatory setting: A type of patients all select one health plan vider competition; 3) increased con- health care setting at which health because it is perceived as having sumer knowledge and responsibility services are provided on an outpa- better AIDS providers. for their own health care decisions; tient basis. Ambulatory settings and 4) enhanced effi ciency of health usually include clinics and surgery Agency for Healthcare Research care delivery. BHCAG provides centers. and Quality (AHRQ): AHRQ its members with a health plan was created in December 1989 as Any-willing-provider laws: Laws that allows the consumer to choose the Agency for Health Care Policy that require managed-care plans among care systems (integrated and Research (AHCPR), a Public to contract with all health-care teams of providers) according to Health Service agency within the providers that meet their terms and their cost, their providers, and their U.S. Department of Health and conditions. performance in areas of quality and Human Services. Th e agency was customer service. reauthorized in December 1999 Appropriate care: Care for which under its current name. AHRQ’s the expected health benefi t exceeds Th e BHCAG model is a modi- mission is to support research to the expected negative consequences fi ed fee-for-service payment system improve the outcomes and qual- by a wide enough margin to justify which provides incentives for ef- ity of health care, reduce its costs, treatment. fi ciency based on utilization. Care address patient safety and medical systems (see defi nition) submit a per capita target rate bid for a

87 specifi ed set of benefi ts each year. only one care system. Care systems service claims are reviewed before Th ese claim targets are adjusted may be organized by physicians, reimbursement is made. Th e pur- based upon risk to refl ect diff er- PPOs or any other entity. pose of this monitoring system is to ences in the illness burden of their validate the medical appropriate- Carriers: A fi scal intermediary, population from the average. Care ness of the provided services and to usually an insurance company or systems are evaluated on a quar- be sure the cost of the service is not HMO, which subcontracts with terly basis, and adjustments are excessive. HCFA to process and pay claims made to match the annual claim for Medicare Parts A and B ser- COBRA: Consolidated Omnibus target. Th erefore, if a system’s costs vices, or which performs the same Budget Reconciliation Act of 1985 exceed the claim target, the pay- services for private purchasers. - A federal budget act which re- ment amount is reduced for the quired that employers off er depart- next quarter, and if costs are below Catastrophic care needs: Service ing employees the opportunity to the target rate, the payment is in- needs which are so expensive that continue in the employer’s health creased for the subsequent quarter. they are fi nancially ruinous. insurance plan at the employee’s BHCAG began implementation of expense. COBRA provisions were the model January 1, 1997. Centers for Medicare and Med- icaid Services (CMS): Th e gov- updated in HIPAA. Cafeteria benefi ts plan: An ar- ernment agency within the De- Coinsurance: Th e portion of the rangement under which employees partment of Health and Human cost of covered services for which may choose their own benefi ts, Services that directs the Medicare an insured is fi nancially responsi- allowing employees to tailor their and Medicaid programs and con- ble. Usually the amount is deter- benefi ts package to meet their ducts research in support of those mined as a fi xed percentage of the specifi c needs. For example, an programs. Formerly known as the total cost of providing the service. employee with no dependents may Health Care Financing Adminis- Often, coinsurance applies after a forgo life insurance but may pre- tration (HCFA). specifi ed deductible has been met. fer more comprehensive health Centers of excellence: Network insurance. Co-morbidity: A conditions that of health care facilities selected exists at the same time as the pri- Capitation: Per capita payment for for specifi c services, e.g., organ mary condition in the same patient providing a contractually specifi ed transplants. (e.g., hypertension is a co-morbidity set of health services to a defi ned of many conditions such as diabe- population over a predetermined Chronic disease: A disease that tes, ischemic heart disease, or end- period of time. For example, medi- has one or more of the following stage renal disease). cal group practices that contract characteristics: is permanent; leaves residual disability; is caused by with HMOs usually receive, in Competitive bidding: A rate-set- nonreversible pathological alterna- advance, a negotiated monthly pay- ting methodology wherein premi- tion; requires special training of the ment that covers all services ren- um rates are determined through patient for rehabilitation; or may be dered by the group for the period, bids submitted by competing expected to require a long period of irrespective of the actual volume of health plans or networks, based on supervision, observation, or care. service rendered by the group. the information and rules of bid- ding established by the purchasing Care systems: A primary-care Claim: Information submitted organization. Th e purchasing or- centered health system with its by a provider or covered person to ganization may reserve the right to affi liated specialty, hospital, and establish that medical services were reject all bids, to reject the highest allied professional arrangements. It provided to a covered person, from bidders, or to negotiate for a lower is organized to provide (or contract which processing for payment to price. However, bidding remains for) the full continuum of medically the provider or covered person is the primary basis for rate setting. necessary services for an enrolled made. population. Primary care physi- Claims review: Th e method by cians are typically affi liated with which an enrollee’s health care

88 Complication: A condition that Defi ned benefi t: A type of health Disease management (DM): A arises during the hospital stay that insurance that assures the enrollee mechanism to provide cost-eff ective prolongs the initial length of stay. that that will receive a specifi c set long-term case management for in- of health services. Th ese services, dividuals with chronic or expensive Copayment: A payment made by however, may be confi ned to those conditions (e.g. diabetes, asthma, an insured at the time that se- that are “medically necessary.” burn recovery). lected services are rendered. Some employer benefi t packages require Defi ned contribution: A type of Disproportionate Share (DSH) a copayment ranging from $2.00 health insurance where the em- Adjustment: A payment adjust- to $20.00 for each visit to a phy- ployer provides the employee with ment under Medicare’s prospective sician’s offi ce. Some impose a a specifi c amount of funding and payment system, or under Medic- fi xed dollar amount for inpatient the employee purchases the actual aid, for hospitals that serve a rela- hospitalization. health insurance or health services. tively large volume of low-income Employers may provide the employ- patients. Cost eff ectiveness: Usually con- ee with discounted provider net- sidered as a ratio, the cost eff ective- Elderly: Individuals age 65 and works, on-line health information ness of a drug or procedure, for ex- over. and tax sheltering in this model. ample, relates the cost of that drug Employee Retirement Income or procedure to the health benefi ts Department Of Health And Hu- Security Act of 1974 (ERISA): A resulting from it. In health terms, man Services (HHS): Th e Federal law that mandates reporting and it is often expressed as the cost per Department of Health and Human disclosure requirements for group year per life saved or as the cost per Services is the agency directed by life and health plans. Most self- quality adjusted life-year saved. law to administer programs involv- insured employers’ health plans are ing health care, Medicare, Medic- Cost reimbursement: A pay- covered by ERISA. aid, family and children’s services, ment method in which providers of fi nancial self-suffi ciency programs, Enrollee: A person who is covered health services are reimbursed on and other human service programs for health benefi ts under an HMO the basis of their cost experience in of the Federal government. contract. An enrollee is not neces- providing the services. Th e reim- sarily a member in the health plan: bursement may be either a per- Dependent: An individual who e.g., an enrollee may be a dependent centage of cost or cost plus a dollar receives health insurance through of a member. Th e terms “enrollee” amount. At one time, Medicare a spouse, parent, or other family and “member,” therefore, are not reimbursed hospitals and other fa- member. synonymous in all instances. An cilities on a cost plus basis. Diagnosis-related groups enrollee is the equivalent of a ben- Cost-shifting: A condition created (DRGs): A classifi cation system efi ciary in an indemnity insurance when defi cits resulting from inad- developed at Yale University using plan. equate reimbursement to providers 490 major diagnostic categories Enrollment: A term used in the from one source (e.g., Medicare or based on the International Clas- context of HMOs to mean, (1) Medicaid) are off set through higher sifi cation of Diseases, 9th revision the process of converting eligible reimbursement from other public (ICD-9) code, in which groups of members of a subscriber group into or private sources (e.g., indemnity patients are classifi ed for measur- HMO enrollees, or (2) the number insurance plans) for the same or ing a medical facility’s patterns in of enrollees in an HMO at a given similar services. delivery of care. Th ese classifi ca- time. tions are employed to determine Deductible: Th e portion of an payments by Medicare for hospital Experience rating: A method of individual’s insured health care inpatient services, and are based on determining premiums based on expenses that the person must pay primary and secondary diagnosis the actual utilization of individual before payment from the insurer and procedures, age, and length of subscriber groups. commences. hospitalization.

89 Evidence-based medicine (EBM): Group contract: An agreement HIPAA provisions are designed to Th e use of current best external between an HMO and a subscriber improve the availability and porta- evidence, balanced with the desires group specifying rates, perfor- bility of health coverage by: of the patient and the clinical ex- mance, covenants, relationships • Limiting exclusions for preex- pertise of health-care providers, in among parties, schedule of benefi ts, isting medical conditions; making decisions about the care of and other conditions. Th e term of individual patients. the contract is generally limited to a • Providing credit for prior 12-month period. health coverage and a process Federal Health Maintenance for transmitting certifi cates Organization Act of 1973 (HMO Health Care Financing Adminis- and other information con- ACT): A federal law regulating tration (HCFA): An agency of the cerning prior coverage to a new HMO activities. Th e HMO Act Department of Health and Human group health plan or issuer; was modifi ed by the Tax Equity Services (HHS), HCFA performs and Fiscal Responsibility Act of many functions including the ad- • Providing new rights that allow 1982 (TEFRA). ministration of the Medicare and individuals to enroll for health Medicaid programs, compilation coverage when they lose other Fee-for-service (FFS): Th e tradi- and publication of health care sta- health coverage or have a new tional method by which physicians tistics, development of health policy dependent; or other providers have charged and budgetary recommendations, patients for professional services. and sponsorship and review of pilot • Prohibiting discrimination For each professional or diagnostic service and fi nancial programs. in enrollment and premiums service, a separate fee is applied, against employees and their irrespective of volume. Under a Health insurance: Financial dependents based on health fee-for-service payment system, protection against the medical status; expenditures increase if the fees care costs arising from disease or themselves increase, if more units accidental bodily injury. Such • Guaranteeing availability of of service are provided or if more insurance usually covers all or part health insurance coverage for expensive services are substituted of the medical costs of treating the small employers and renewabil- for less expensive ones. Th is system disease or injury. Insurance may be ity of health insurance cover- contrasts with salary, per capita, or obtained on either an individual or age in both the small and large other prepayment systems where a group basis. group markets; and the payment to the physician is not Health Insurance Portability • Preserving, through narrow changed with the number of ser- and Protection Act (HIPPA): preemption provisions, the vices actually used. Th e Health Insurance Portability States’ traditional role in regu- Fee schedule: A comprehen- and Accountability Act of 1996 lating health insurance, includ- sive listing of fees used by either a (HIPAA), Pub. L. 104-191, some- ing State fl exibility to provide health care plan or the government times referred to as the Kennedy- greater protections. to reimburse physicians and/or Kassebaum bill, was enacted in Health maintenance organization other providers on a fee-for-service 1996. HIPAA provides, among (HMO): An organization that basis. other things, improved continu- provides both fi nancing for, and the ity (also called “portability”) and First-dollar coverage: A feature delivery of, physician and hospital availability with respect to group of an insurance plan in which there services to an enrolled popula- health-plan coverage and group is no deductible, and therefore the tion for a fi xed sum of money, paid health insurance provided in con- plan’s sponsor pays a proportion or in advance (prepaid), for a speci- nection with employment, and all of the covered services provided fi ed period of time. Th ese health insurance coverage in the individual to a patient as soon as he or she services include a wide variety of insurance market (not connected enrolls. medical treatments, inpatient and with employment). outpatient hospitalization, home health services, ambulance services,

90 and sometimes dental and phar- Health plans: Organizations their payments (i.e., usually about macy services. Th e HMO arranges which contract with providers to 20% per year). If, by the end of the for the provision of health services deliver health care services to en- year, the physician’s cost for treat- through contracts with providers, rolled members. Th ese include, but ment falls under this set amount, who may be organized as a group are not limited to, managed-care then the physician receives his en- model, an independent practice as- entities. tire “withhold fund.” If it does not, sociation (IPA) model, a network the HMO can then withhold any Hospice: A health care facility model or a staff model. With few part of this amount, at its discre- that provides supportive care for exceptions, enrollees are required tion, from the fund. Essentially, the terminally ill. to use the services of participating the physician is put “at risk” for providers, except in point-of-service Indemnity: Health insurance ben- keeping down the treatment cost. (POS) HMO plans. efi ts provided in the form of cash Th is is the key to the HMO’s fi nan- payments rather than services. An cial viability. HMO - group model: (1) An indemnity insurance contract usu- HMO contracting for professional Inpatient: A patient admitted ally defi nes the maximum amounts services with a single medical group to a hospital and who is receiving which will be paid for the covered practice closely related to but le- services under the direction of a service. gally separate from the HMO, with physician. the contracting relationship being Indemnity carrier: An insurance Integrated System (IS), Inte- substantially (or totally) and recip- company or benevolent associa- grated Delivery System (IDS), or rocally exclusive; or, (2) an HMO tion that off ers selected coverages Integrated Health Care System that contracts with a network of within a framework of service defi - (IHS): An organization in which group medical practices for profes- nitions, fee schedules, limitations, hospital(s) and physicians com- sional services, usually on a non- and exclusions as negotiated with bine their assets, eff orts, risks and exclusive basis. Th e group practices subscriber groups. Insured persons rewards, and through which they are independent from the HMO(s), are reimbursed after carriers review deliver comprehensive health care and perform services for other and process fi led claims. services. health plans, as well as for private Indemnity insurance: Traditional patients, Medicare and Medicaid Job lock: A situation when an fee-for-service medicine in which patients, etc. employees is forced to remain in a providers are paid according to the job he or she otherwise would leave HMO - network model: A net- service performed. because that job provides necessary work of group practices under the health-insurance coverage. administration of one HMO. Individual (or Independent) Prac- tice Association Model (IPA): Leapfrog Group: An organiza- HMO - staff model: Th e staff An individual practice association tion of large health-care purchasers model HMO is the purest form of contracts with independent physi- who seek to use their purchasing managed care. All of the physicians cians who work in their own private power to infl uence providers and are in a centralized site, in which practices, and see fee-for-service improve patient safety. Members all clinical and perhaps inpatient patients as well as HMO enrollees. follow a set of purchasing principles services and pharmacy services Physicians are paid by capitation to recognize and reward providers are off ered. Th e HMO holds the for the HMO patients and by con- and practices that reduce medical tightest management reins in this ventional means for their fee-for- errors. setting, because none of the physi- service patients. Physicians be- cians traditionally practice on an longing to the IPA guarantee that Long-term care: Services ordi- independent fee-for-service basis. the care needed by each patient for narily provided to the infi rm in a Physicians are employees of the whom they are responsible will fall skilled nursing, intermediate-care, HMO in this setting, as they are under a certain amount of money. personal-care, supervisory-care, or not in a private or group practice. Th ey guarantee this by allowing the elder-care facility. HMO to withhold an amount of

91 Managed care: Systems that in- cause harm to patients undergoing Medicare+Choice: A Medi- tegrate the fi nancing and delivery treatment. Errors can include mis- care program created by the of health care services to covered diagnosis, providing inappropriate 1997 Balanced Budget Act. individuals by means of: 1) arrange- therapy, or not providing treatment Medicare+Choice allows the Cen- ments with selected providers to when it is required. ters for Medicare and Medicaid furnish comprehensive services to Services (CMS) to contract with a Medical protocols: Medical pro- members; 2) explicit criteria for variety of diff erent managed-care tocols are guidelines that physi- the selection of health-care provid- and fee-for-service entities off er- cians may be required to follow to ers; 3) signifi cant fi nancial incen- ing additional alternative modes have an acceptable clinical outcome. tives for members to use providers of care, including managed care, to Protocols provide the caregiver and procedures associated with the Medicare participants. with specifi c treatment options or plan; and 4) formal programs for steps when faced with a particular Medicare Payment Advisory quality assurance and utilization set of clinical symptoms or signs or Commission (MEDPAC): Th is review. laboratory data. Medical proto- federally chartered commission is Managed competition: A system cols are being designed through an comprised of experts in health poli- of providing health care where in- accumulated database of clinical cy and fi nance who advise Congress dividuals choose from a number of outcomes. and the Administration on changes competing health plans or HMOs. in payment rates and methods for Medical savings account (MSA): Th e HMOS compete based on the the Medicare program. A type of health insurance that cost and quality of their services. provides a tax-sheltered account Medigap: Insurance provided by Mandated benefi ts: Health from which an individual can carriers to supplement the monies benefi ts that health care plans are purchase health services. MSAs reimbursed by Medicare for medi- required by state or federal law to typically provide 100% cover- cal services. Because Medicare pays provide to members. age for preventive care and have a physicians for services according high deductible ($2,000 or more) to their own fee schedule, regard- Market area: Th e targeted geo- catastrophic benefi t. Savings in less what the physician charges, graphic area or areas in which the MSA can be rolled into future the individual may be required to a health plan’s principal market years and eventually deployed as a pay the physician the diff erence potential is located. It may or tax deferred retirement fund. between Medicare’s reimburs- may not be the same as an HMO’s able charge and the physician’s fee. defi ned service area. Frequently, Medicare: A federal health care Medigap is meant to fi ll this gap in a market area overlaps the service payment program authorized by reimbursement, so that the Medi- areas of providers. Title XVIII of the Social Security care benefi ciary is not at risk for the Act. Th e program operates as a Medicaid (MA, Medical Assis- diff erence. federally fi nanced health insurance tance): A federal program autho- program for the aged and disabled, Member: A participant in a health rized by Title XIX of the Social and is administered by the Health plan who makes up the plan’s Security Act. Th e program subsi- Care Financing Administration enrollment. dizes state programs for insuring through contracts with fi scal agents that certain health care services are Morbidity: Th e incidence and se- in each state. Part A of the Medi- available to individuals who lack verity of sickness in a defi ned class care program provides insurance resources to pay for such services. of people. coverage for hospital care, and Part Some states have broader Medicaid B for other medical care. Th e pro- Mortality: Th e death rate at coverage than others, but certain gram includes Medicare recipients each age, calculated from prior minimum federal requirements who are enrolled in an HMO un- experience. must be met by all states. der a cost, risk, or HCPP (Health Medical errors: Errors made by Care Prepayment Plan) contract. practitioners or organizations that (See also “Part A” and “Part B.”)

92 Offi ce of the Inspector General Peer review: Reviewing a prac- practices with a guideline’s recom- (OIG) of HHS: Th e investigatory titioner’s practice to determine if mendations. Results of such com- arm of the Department of Health they meet qualitative standards, parisons may be used for several and Human Services, with juris- fall within an acceptable range, purposes: reimbursement, provider diction over alleged violations of a and employ effi cacious procedures. education, provider feedback, and variety of statutes, including Medi- Peer review is performed by prac- credentialing or re-credentialing. care and Medicaid fraud and abuse titioners in the same specialty and Pre-existing condition: Any med- laws. geographic area. ical condition that has been diag- Open enrollment period: Th e Peer Review Organization nosed or treated within a specifi ed period of time stipulated in a group (PRO): A private organization period before the member’s eff ec- contract in which eligible persons that subcontracts with HCFA to tive date of health coverage under in a group may choose a health plan review the medical appropriateness the group contract. alternative for the coming benefi t of services and quality of care pro- Preferred providers: Physicians, year. vided to Medicare benefi ciaries. hospitals, and other health care Out-of-pocket costs: Th e share of Physician Organization (PO): A providers who contract to provide health services payments paid by generic term for an organization of health services to persons covered the enrollee. physicians, which technically could by a particular health plan. be a professional corporation, part- Outpatient: A patient who re- Preferred Provider Arrangement nership, IPA, PPO, foundation, ceives health care services without (PPA): Generally, an arrangement etc., as well as physicians organized being admitted to a hospital. in which a payer contracts with as partially or fully integrated providers who agree to provide Part A: Also known as “hospi- group practices. health-care services to benefi ciaries tal insurance” (HI), Part A of the Point-of-service model: Some- in exchange for discounted fee-for- Medicare program pays for certain times referred to as an “open- service reimbursement. Th e term inpatient hospital, nursing facility, ended” HMO, the point-of-service is interchangeably used to refer to: hospice and home health services model is one in which the patient the relationship between an insurer for individuals age 65 years or can receive care either by physician (or other payer) and the benefi - older, and certain other individuals. contracting with the HMO or by ciary (i.e., an insurance product); Part B: Also known as “supple- those not contracting. Physicians the discounted fee arrangement mentary medical insurance” (SMI), not contracting with the HMO between the payer and provider; or Part B of the Medicare program but who see an HMO patient an organization created to obtain reimburses benefi ciaries for cer- are paid according to the services discounted fee contracts for provid- tain physician services, outpatient performed. Th e patient is given an ers (see PPO). hospital services, miscellaneous incentive to utilize contracted pro- Preferred Provider Organization outpatient services, durable medi- viders through the fuller coverage (PPO): Often confused with a cal equipment, ambulatory surgery off ered for contracted care. PPA, a PPO may represent any one services, home health services and Practice guidelines: Explicit of the three defi nitions identifi ed certain diagnostic tests. recommendations for the man- for PPA, above. As an insurance Payer: An organization, such as agement of specifi c clinical prob- product, a PPO is a discounted fee- insurance company or HMO, that lems. Guidelines are developed for-service indemnity arrangement pays or reimburses a provider for from medical literature and expert in which members receive fi nancial health care services rendered by panels and may be endorsed by incentives to select their care from that provider to a patient or health professional societies. Guidelines a panel of “preferred providers” plan member. A fi scal intermedi- may be used by insurers to evaluate (physicians and hospitals). Mem- ary between purchasers and con- the quality and appropriateness of bers may select care from non-panel sumers of health care. medical care by comparing actual providers, usually at additional cost

93 to the member. As a “provider” or- Primary-care network: A group is received before care is actually ganization, a PPO is a joint venture of primary-care physicians who needed. It gives the provider orga- among physicians that seeks PPO have joined together to share the nization a fi nancial incentive to uti- contracts with payers; an arrange- risk of providing care to their pa- lize fewer resources, as they get to ment developed by insurers to tients who are members of a given keep the diff erence between what is induce providers to discount their health plan. prepaid and what is actually used. fees; or, an independent enterprise Primary-care provider: An as- Prospective Payment System that brokers contracts between pay- signed medical practitioner who is (PPS): A payment method used ers and providers. responsible for developing the care by Medicare for hospital inpa- Premium: Th e price or amount plan, delivering and coordinating tient services in which predeter- which must be paid periodically services and arranging for appropri- mined amounts, based on the (e.g., monthly) to purchase insur- ate use of specialty services. A pri- DRG system, are paid to hospitals ance coverage or to keep an insur- mary-care physician in an HMO, as reimbursement for their inpa- ance policy in force. Virtually all or in a group-practice provider to tient operating costs for treating health insurance programs require an HMO, is the initial provider for benefi ciaries. the payment of a premium by the a patient seeking medical services, Provider networks: An organized benefi ciary, and/or by someone else and controls referrals to other group of care providers selected by (such as the employer) on the ben- specialists, sub-specialists, diagnos- a health plan because they meet the efi ciary’s behalf. Premiums paid to tic services, and other providers of plan’s standards for effi cient qual- HMOs are often called capitation health care, to optimize responsibly ity practice. Th e network manages payments. the utilization of service, thereby health care costs through several reduce the costs of care. Preventive care: Health care em- techniques: phasizing priorities for prevention, Professional Review Organiza- • Credentialing: Th is process is early detection, and early treatment tion or Peer Review Organiza- undertaken to document the of conditions, generally including tion (PRO): An organization that provider’s professional quali- routine physical examination, im- reviews the activities and records of fi cations and ability to meet munization, and well-person care. a health-care provider, institution, standards for quality, cost-ef- or group. Th e reviewer is gener- Primary care: Basic or general fectiveness, and access required ally a physician if a physician is the health care focused on the point at by the health plan. subject of the review; a group of ad- which a patient ideally fi rst seeks ministrators, physicians, and allied • Shared fi nancial risk: Provid- assistance from the medical care health care personnel if a hospital is ers often share the fi nancial system. Primary care is considered the subject of the review; etc. Th e risk of health care delivery by comprehensive when the primary PRO can be state-sponsored or accepting a capitated payment. provider takes responsibility for independent. Alternatively, a percentage of the overall coordination of the care provider’s fees may be withheld of the patient’s health problems, Professional Services Agreement to cover a health plan’s defi cits be they biological, behavioral, or (PSA): An agreement in which at year end. Under a withhold- social. Th e appropriate use of con- physicians (and possibly other pro- ing system, providers receive an sultants and community resources fessionals) agree to provide their annual payment from the with- is an important part of eff ective services to a person or organiza- held pool based on the fi nancial primary care. Such care is gener- tion. For example, physicians may experience of the plan and their ally provided by physicians but is enter into a PSA with an Integrat- own performance. increasingly provided by other per- ed Health care System to provide sonnel such as nurse practitioners services to the IHS’ patients. • Rate negotiation: Th e health or physician assistants. plan negotiates lower provider Prospective payment: A prospec- fees in exchange for antici- tive payment is a payment that pated increased volume. Th ese

94 discounts are then passed along Referrals: Based on client need, level of government should contrib- to purchasers. a process of arranging appropri- ute to sharing the fi nancial respon- ate services to ensure coordination, sibilities and fi nancial risk, which • Consumer incentive: Th e con- follow-up, non-duplication of ser- involves consideration of the appro- sumer has a fi nancial incentive vices, and communication between priate tax to provide the funding. to use the network because the providers. Th is process may or may consumer assumes greater out- Insurance risk, or risk-bearing as a not include authorized payment for of-pocket expense when using a term of art in the insurance indus- services. provider outside the network. try, is specifi cally in reference to the Reimbursement: A payment to a business of insurance and is regu- Providers: Institutions and indi- provider in exchange for the per- lated by government. viduals who are licensed to provide formance of health services. Th e health care services (for example, Risk adjustment or risk equaliza- term more technically is applicable hospitals, skilled nursing facili- tion: A means of adjusting capita- to payments made to providers by ties, physicians, dentists, etc.) May tion rates paid to prepaid plans in Medicare or Medicaid. also refer to medical supply fi rms order to refl ect more accurately the and vendors of durable medical Reinsurance: Protection pur- expected cost of providing health- equipment. chased by insurers including care services to an individual. Th e HMOs, IPAs or PPOs from insur- Johns Hopkins Adjusted Clinical Purchasing pool: Organization ance companies that specialize in Groups (ACG) case-mix system is that groups together workers in underwriting risks that substan- one method currently being used. small businesses, those who are tially exceed basic or conventional self-employed, and other unin- Risk pool: A defi ned patient pop- limits of liability. sured into larger pools that can ulation to be covered by insurance, achieve better ratings and deeper Resource-Based Relative Value from which revenue and expenses discounts. Th ese better rates come Scale (RBRVS): A HCFA pay- are determined. from being able to spread risk ment method by which physicians Self-insured: An organization over larger numbers of individu- receive an amount set forth in a (usually an employer) that assumes als. Besides the economies of scale, fee schedule based on the relative the fi nancial risk of its members’ purchasing pools hope to maintain prices and values of the procedures. health benefi ts’ costs, rather than volume purchasing power for their Revenue: Th e gross amount of purchasing insurance from an in- members. earnings received by an entity for surance company, HMO, or other Quality improvement: A continu- the operation of a specifi c activity. fi scal intermediary. Also, a hospital ous process that identifi es problems It does not include any deductions may self-insure for malpractice in- in health care delivery, examines for such items as expenses, bad surance, rather than purchase from solutions to those problems, and debts, or contractual allowances. an insurer. regularly monitors the solutions for Risk: Th ere are two distinct types Service area: A geographical improvement. of risk: fi nancial risk and insurance territory that an HMO or other Rating - community rating: A risk. All three levels of government provider organization designates rating method in which actuarial have fi nancial risk in the fund- for off ering and providing enroll- statistics are used regarding a total ing of health and human services. ment or service to members. Since population to determine a uniform County government has both a reasonable access to the health premium. direct responsibility to its resi- care services is a primary objective dents to manage fi nancial risk to of HMOs and providers, a com- Rating - experience rating: A rat- county property tax revenues and mon standard is that members or ing method in which actuarial sta- responsibilities under statute as a patients should not have to travel tistics are used regarding a specifi c subdivision of state government, more than 30 minutes in order to group (e.g., age, sex, etc.) to deter- which involve fi nancial risk. Th e reach a service site. mine the premium. challenge is to determine how each

95 Single-payer system: A health the clinical safety and effi cacy of an Underinsured: People with public care system in which all payments intervention. In today’s health-care or private insurance policies that for defi ned benefi ts or services are world, it includes a broader view of do not cover all necessary medical paid from a single source, typically clinical outcomes, such as the eff ect services, resulting in out-of-pocket the national government. Most of on a patient’s quality of life, and the expenses that exceed their ability the western industrialized nations, eff ect on society. to pay. with the exception of the United Tertiary care: Tertiary care is Underwriting: In insurance, the States, have some form of a single- administered at a highly special- process of selecting, classifying, payer system. ized medical center. It is associated evaluating, and assuming risks ac- Skilled nursing facility (SNF): with the utilization of high-cost cording to their expected costs. Its Typically an institution for con- technology resources. purpose is to ensure that the group valescence or a nursing home, the or individual insured has the same Th ird-party payer: An organiza- skilled nursing facility provides a probability of loss and probable tion that pays for or underwrites high level of specialized care for amount of loss, within reasonable coverage for health care expenses. long-term or acute illness. It is an limits, as the universe on which alternative to extended hospital Total Quality Management premium rates were based. stays or diffi cult home care. (TQM): A method originally de- Uninsured: People who lack pub- veloped by W. Edward Deming for State Children’s Health Insur- lic or private health insurance. examining systems and processes at ance Program (SCHIP): SCHIP medical group practices to identify Utilization: Th e frequency with was enacted as part of the Balanced and remedy ineffi ciency, error, or which a benefi t is used, a service is Budget Act of 1997 as the new redundancy in operations or the performed, or a referral is made. Title XXI of federal statutes. It total patient care experience. Th e For example, HMO utilization of provides funds for states to expand system is based, in part, on obtain- inpatient (hospital) services is com- health insurance to children of low- ing information and comments monly expressed as the number of income families. Each state has a from staff and patients in order to inpatient days per year per thou- unique SCHIP program. evaluate and resolve procedural or sand members. Th e relative rate of Tax Equity and Fiscal Responsi- service defi ciencies. service utilization is a critical factor bility Act of 1982 (TEFRA): Th e for the fi nancial success of provid- TRICARE: Th e health-care pro- federal law that created the current ers in prepaid contracting. gram for members of the military, risk and cost contract provisions eligible dependents, and military Utilization review (UR): A under which health plans contract retirees. TRICARE was former- systematic, retrospective review with HCFA and the Medicare ly called CHAMPUS (Civilian designed to determine the medical program. Health and Medical Program of necessity and economic appropri- Technology assessment: Th e the Uniformed Services). ateness of health services. term used to describe the evalu- Uncompensated care: Service pro- ation process for new or existing vided by physicians and hospitals diagnostic and therapeutic devices Glossary based on AcademyHealth, for which no payment is received and procedures. Technology as- “Glossary of Terms Commonly Used from the patient or from third- sessment evaluates the eff ect of a in Health Care,” January 2004, http:// party payers. Some costs for these www.academyhealth.org/publications/ medical procedure, diagnostic tool, services may be covered through glossary.pdf (accessed September 18, medical device, or pharmaceutical cost-shifting. Not all uncompen- 2007); and National Institute of Health product. In the past, technology Policy, “Glossary of Health Policy sated care results from charity care. assessment meant primarily evalu- Terms,” http://www.nihp.org/NEW- It also includes bad debts from ating new equipment, focusing on glossary.htm (accessed September 18, persons who are not classifi ed as 2007). charity cases but who are unable or unwilling to pay their bills.

96 End Notes:

1 Research and Policy Committee of the Commit- 11 Elizabeth A. McGlynn et al., “Th e Quality of tee for Economic Development, A New Vision for Health Care Delivered to Adults in the United Health Care: A Leadership Role for Business (New States,” New England Journal of Medicine 384, no. York and Washington, DC: Committee for Eco- 26 (2003): pp. 2635-2645. nomic Development, 2002), p. 41. 12 Lucian L. Leape and Donald M. Berwick, “Five 2 Robin Toner and Janet Elder, “Most Support Years After to Err Is Human: What Have We U.S. Guarantee of Health Care,” New York Times, Learned?” Journal of the American Medical Associa- March 2, 2007, p. A1. tion 293, no. 19 (2005): pp. 2384-2390. 3 David M. Cutler, Your Money or Your Life: Strong 13 J. Wennberg and A. Gittelsohn, “Variations in Medicine for America’s Health Care System (New Medical Care Among Small Areas,” Scientifi c York: Oxford University Press, 2004). Cutler American 246, no. 4 (1982): pp. 120-134; John E. argues that additional spending on health care has Wennberg et al., “Changes in Tonsillectomy Rates had a signifi cant benefi cial eff ect on outcomes. Associated with Feedback and Review,” Pediatrics 59, no. 6 (1977): pp. 821-826. 4 Steffi e Woolhandler and David Himmelstein, “Paying for National Health Insurance and Not 14 DeNavas-Walt, Proctor, and Smith, Income, Pov- Getting It,” Health Aff airs 21, no. 4 (2002): pp. 88- erty, and Health Insurance Coverage in the United 98. States: 2006, p. 18 (see note 8). 5 David U. Himmelstein et al., “Illness and Injury 15 Richard Kronick, “Health Insurance Coverage as Contributors to Bankruptcy,” Health Aff airs, and Mortality Revisited,” (unpublished manu- Web Exclusive, February 2, 2005. script, National Center for Health Statics, 2007); Jack Hadley, “Sicker and Poorer – Th e Conse- 6 Christine Borger et al., “Health Spending Projec- quences of Being Uninsured: A Review of the tions Th rough 2015: Changes on the Horizon,” Research on the Relationship between Health Health Aff airs 25, no. 2 (2006): pp. 61-73. Insurance, Medical Care Use, Health, Work, 7 National Coalition on Health Care, “Health In- and Income,” Medical Care Research and Review surance Cost: Facts on the Cost of Health Care,” 60, No. 2 suppl. (2003): pp. 3S-75S; Committee http://www.nchc.org/facts/cost.shtml (accessed on the Consequences of Uninsurance, Board on June 12, 2007). Health Care Services, Institute of Medicine of the National Academies, Care Without Coverage: Too 8 U.S. Census Bureau, Income, Poverty, and Health Little Too Late (Washington, DC: National Acad- Insurance Coverage in the United States: 2006, by emy Press, 2002). Also, new research has docu- Carmen DeNavas-Walt, Bernadette D. Proctor, mented that mothers who lack health insurance and Jessica Smith, Current Population Reports, are more likely to have low-birth-weight infants, Consumer Income (Washington, DC, 2007), p. 5, who then have enduring greater probabilities of table 1. adverse life outcomes. Rucker C. Johnson and Robert F. Schoeni, “Th e Infl uence of Early-Life 9 Linda T. Kohn, Janet M. Corrigan, and Molla S. Events on Human Capital, Health Status, and Donaldson, eds., To Err Is Human: Building a Safer Labor Market Outcomes Over the Life Course,” Health System (Washington, DC: National Acad- Populations Studies Center Research Report (Univer- emy Press, 2000). sity of Michigan), 2007, no. 07-616. 10 Philip Aspden, and the Committee on Identify- 16 Erik Eckholm, “To Lower Costs, Hospitals Try ing and Preventing Medication Errors, Board on Free Basic Care for Uninsured,” New York Times, Health Care Services, Institute of Medicine of October 25, 2006, p. A1. the National Academies, eds., Preventing Medica- tion Errors (Washington DC: National Academy Press, 2006).

97 End Notes:

17 Paul Fronstin, “Sources of Health Insurance and 25 Measured on an age-specifi c per-capita basis. Vic- Characteristics of the Uninsured: Analysis of the tor R. Fuchs, “Health Care for the Elderly: How March 2000 Current Population Survey,” Em- Much? Who Will Pay for It?” Health Aff airs 18, ployee Benefi t Research Institute Issue Brief, no. 228 no. 1 (1999): pp. 11-21. (2000). 26 Greg Anand, “How Drugs for Rare Diseases Be- 18 Paul Fronstin, “Sources of Health Insurance and came Lifeline for Companies,” Wall Street Journal, Characteristics of the Uninsured: Analysis of the November 15, 2005, p. A1. March 2005 Current Population Survey,” Em- ployee Benefi t Research Institute Issue Brief, no. 287 27 Sylvia Pagan Westphal, “Concerns Prompt Some (2005). Hospitals to Pare Use of Drug-Coated Stents,” Wall Street Journal, June 22, 2006, p. A1. Ex- 19 William J. Wiatrowski, “Documenting Benefi ts amples include Vioxx and possibly drug eluting Coverage for All Workers,” U.S. Department of stents. See also Gina Kolata, “Study Questions Labor, Bureau of Labor Statistics, http://www. Computerized Breast Cancer Detection,” New bls.gov/opub/cwc/cm20040518ar01p1.htm#3 (ac- York Times, April 5, 2007, p. A14. cessed August 30, 2007). 28 Precisely, “…among adults ages 20-74, obesity 20 U.S. Bureau of the Census, “Health Insurance prevalence increased from 14.5 percent (1976-80) Coverage Status and Type of Coverage – All to 30.4 percent 20 years later (1999-2000). Dur- Persons by Age and Sex: 1999 to 2006,” Histori- ing the same period, total diabetes prevalence, cal Health Insurance Table HIA-2, http://www. which is clinically linked to obesity, increased 53 census.gov/hhes/www/hlthins/historic/hihistt2. percent, and diagnosed (treated) diabetes preva- html (accessed August 29, 2007). lence increased 43 percent.” Kenneth E. Th orpe et al., “Th e Rising Prevalence of Treated Disease: 21 Henry J. Kaiser Family Foundation and the Eff ects on Private Health Insurance Spending,” Health Research and Educational Trust, Employer Health Aff airs, Web Exclusive, June 27, 2005; Ken- Health Benefi ts, 2007 Summary of Findings (Menlo neth E. Th orpe, “Th e Rise in Health Care Spend- Park, CA: Henry J. Kaiser Family Foundation; ing and What to Do About It,” Health Aff airs 24, Chicago: Health Research and Educational Trust, no. 6 (2005): pp. 1436-1445. 2007), p. 3, exhibit D. 29 Johns Hopkins University and the Robert Wood 22 Ibid., p. 1, exhibit A. Johnson Foundation, “Chronic Conditions: Mak- 23 OECD Health Division, “OECD Health ing the Case for Ongoing Care, September 2004 Data 2006,” OECD, http://www.oecd.org/ Update,” Partnership for Solutions, www.partner- dataoecd/20/51/37622205.xls (accessed June 12, shipforsolutions.org (accessed August 17, 2006). 2007). Th e latest fi gures for total health expendi- 30 Committee on Quality of Health Care in Amer- tures, usually for 2004, were the highest on record ica, Institute of Medicine of the National Acad- for 17 of the 30 OECD countries, and within 0.3 emies, Crossing the Quality Chasm: A New Health percentage points of the highest for nine oth- System for the 21st Century (Washington, DC: Na- ers. Th e only exceptions were Finland, Greece, tional Academy Press, 2001). Ireland, and Norway. Note, however, the recent constructive reforms in the Netherlands. Gau- 31 Henry J. Kaiser Family Foundation and the tam Naik, “In Holland, Some See Model for U.S. Health Research and Educational Trust, Employer Health-Care System,” Wall Street Journal, Septem- Health Benefi ts, 2007 Annual Survey (Menlo Park, ber 6, 2007, p. A1. CA: Henry J. Kaiser Family Foundation; Chicago: Health Research and Educational Trust, 2007), p. 24 J. D. Kleinke, “Dot-Gov: Market Failure and the 52, exhibit 3.6. Creation of a National Health Information Tech- nology System,” Health Aff airs 24, no. 5 (2005): pp. 1246-1262.

98 End Notes:

32 Jon B. Christianson and Roger Feldman, “Ex- 42 Kenneth E. Th orpe and David H. Howard, “Th e porting the Buyers’ Health Care Action Group Rise in Spending Among Medicare Benefi cia- Purchasing Model: Lessons from Other Commu- ries: Th e Role of Chronic Disease Prevalence and nities,” Milbank Quarterly 83, no. 1 (2005): p. 149. Changes in Treatment Intensity,” Health Aff airs 25, no. 5 (2006): pp. 378-388. 33 Marilyn Werber Serafi ni, “Taking Matters into Th eir Own Hands,” National Journal, September 43 Johns Hopkins University and the Robert Wood 30, 2006, pp. 36-40. Johnson Foundation, “Chronic Conditions” (see note 29). 34 In 2002, 80 percent of health spending was on people who incurred at least $3,219. Mark W. 44 Robert Pear, “Select Hospitals Reap a Windfall Stanton and the Agency for Healthcare Research Under Child Bill,” New York Times, August 12, and Quality, “Th e High Concentration of U.S. 2007, p. A1. Health Care Expenditures,” Research in Action, no. 19 (2006). 45 Atul A. Gawande et al., “Does Dissatisfaction with Health Plans Stem from Having No Choic- 35 Joseph P. Newhouse and the Insurance Ex- es?” Health Aff airs 17, no. 5 (1998): pp. 184-194; periment Group, Free for All? – Lessons from the Karen Davis et al., “Choice Matters: Enrollees RAND Health Insurance Experiment (Cambridge, Views of Th eir Health Plans,” Health Aff airs 14, MA: Harvard University Press, 1993). no. 2 (1995): pp. 99-112; Alain C. Enthoven, “Employment-Based Health Insurance Is Failing: 36 For RAND studies on appropriateness, see: Now What?” Health Aff airs, Web Exclusive, May RAND Health, “Research Highlights: Assessing 28, 2003. the Appropriateness of Care,” RAND Corpora- tion, 1998, http://www.rand.org/publications/RB/ 46 M. L. Berk and A. C. Monheit, “Th e Concen- RB4522. See also: John E. Wennberg and the tration of Health Care Expenditures, Revisited,” Dartmouth Atlas Working Group, “Th e Dart- Health Aff airs 20, no. 2 (2001): pp. 9-18; Stan- mouth Atlas Project,” Center for Evaluative Clini- ton and the Agency for Healthcare Research and cal Sciences at Dartmouth Medical School, www. Quality, “High Concentration of U.S. Health dartmouthatlas.org (accessed January 11, 2007). Care Expenditures” (see note 34). Stanton reports For under-use, see: McGlynn et al., “Quality of that in 2002, 80 percent of total health-care ex- Health Care,” pp. 2635-2645 (see note 11). For penses were spent on the top 20 percent of spend- misuse, see Kohn, Corrigan, and Donaldson, To ers with spending exceeding $3,219. Err Is Human (see note 9). 47 Berk and Monheit, “Concentration of Health 37 Henry J. Kaiser Family Foundation and the Care Expenditures” (see note 46); Stanton and Health Research and Educational Trust, 2007 An- the Agency for Healthcare Research and Quality, nual Survey, p. 47, exhibit 3.1 (see note 31). “High Concentration of U.S. Health Care Expen- ditures” (see note 34). 38 Malcolm K. Sparrow, License to Steal: How Fraud Bleeds America’s Health Care System (Boulder, CO: 48 Newhouse and the Insurance Experiment Group, Westview Press, 2000). Free for All? (see note 35). 39 Alain C. Enthoven, Health Plan: Th e Practical 49 Gary Claxton et al., “What High-Deductible Solution to the Soaring Cost of Medical Care (Wash- Plans Look Like: Findings from a National Sur- ington, DC: Beard Books, 2002). vey of Employers, 2005,” Health Aff airs, Web Ex- clusive, September 14, 2005. 40 Ibid. 50 Johns Hopkins University and the Robert Wood 41 American Hospital Directory, “Medicare Prospec- Johnson Foundation, “Chronic Conditions” (see tive Payment System,” http://www.ahd.com/pps. note 29). Th is is based on the 2001 Medical Ex- html (accessed August 27, 2007). penditure Panel Survey. Th e defi nition of chronic conditions is that they last a year or longer, limit

99 End Notes:

what people can do and/or require ongoing medi- 58 For example, three years before the heart damag- cal care. A lower estimate can be found in an ear- ing eff ects of COX-2 inhibitors (Vioxx, Bextra and lier study: C. Hoff man, D. Rice, and H. Y. Sung, Celebrex) became widely publicized, Kaiser Per- “Persons with Chronic Conditions. Th eir Preva- manente entered into collaborative research with lence and Costs,” Journal of the American Medi- the FDA to evaluate the safety of these drugs. cal Association 276, no. 18 (1996): pp. 1473-1479. At that time, the Kaiser market share of COX-2 Th is was based on the 1987 Medical Expenditure inhibitors was about 5 percent of all NSAIDs Survey. compared to about 45 percent for the community in general. After Vioxx was withdrawn, COX-2 51 Committee on Quality of Health Care in Amer- inhibitor prescriptions at Kaiser accounted for ica, Institute of Medicine of the National Acad- less than 1 percent of the market for all NSAIDs emies, Crossing the Quality Chasm (see note 30). compared to about 25 percent in the community 52 Th orpe et al., “Rising Prevalence of Treated at large. Senate Committee on Finance, Testi- Disease” (see note 28); Kenneth E. Th orpe et al., mony on Vioxx and Drug Safety, by Sandra Kweder, “Trends: Th e Impact of Obesity on Rising Medi- Deputy Director, Offi ce of New Drugs, Center cal Spending,” Health Aff airs, Web Exclusive, for Drug Evaluation and Research, U.S. Food and October 20, 2004; Th orpe and Howard, “Rise in Drug Administration, 108th Cong., 2nd sess., No- Spending Among Medicare Benefi ciaries” (see vember 18, 2004; Beverly Hayon, “Kaiser Perma- note 42). Rob Stein, “More Kids Developing nente Study Confi rms Direct to Consumer Ad- High Blood Pressure,” Washington Post, September vertising Infl uences Physician Prescribing,” Kaiser 11, 2007, p. A1. Permanente, October 9, 2005, http://ckp.kp.org/ newsroom/national/archive/nat_051007_dtcdrug- 53 Th eresa Agovino, “More Companies Opening study.html. In-House Clinics for Employees to Help Reduce Health Costs,” Henry J. Kaiser Family Founda- 59 Canadian Institute for Health Information, “Wait tion, Daily Health Policy Report, http://www. Time Tables – A Comparison by Province, 2007,” kaisernetwork.org/daily_reports/rep_index. February 2007, http://secure.cihi.ca/cihiweb/en/ cfm?hint=3&DR_ID=39690 (accessed December downloads/aib_provincial_wait_times_e.pdf; 18, 2006). Nadeem Esmail and Michael Walker, “Waiting Your Turn: Hospital Waiting Lists in Canada, 54 Wennberg and the Dartmouth Atlas Working 15th Edition,” Fraser Institute, October 2005, Group, “Dartmouth Atlas Project” (see note 36). http://www.fraserinstitute.ca/shared/readmore. asp?sNav=pb&id=801. 55 Lawrence K. Altman, “Clinton Surgery Puts At- tention on Death Rate,” New York Times, Septem- 60 Th omas Bodenheimer, “Th e Not-So-Sad History ber 6, 2004, p. A1. of Medicare Cost Containment as Told in One Chart,” Health Aff airs, Web Exclusive, January 23, 56 U.S. Congressional Budget Offi ce, Th e Sustain- 2003. able Growth Rate Formula for Setting Medicare’s Physician Payment Rates, by Geoff rey Gerhardt, 61 U.S. Department of Health and Human Ser- Economic and Budget Issue Brief, 2006, http:// vices, Report on the Financial Statement Audit of the www.cbo.gov/ftpdocs/75xx/doc7542/09-07- Health Care Financing Administration for Fiscal Year SGR-brief.pdf; House Committee on Energy and 1996, by June Gibbs Brown, Inspector General, Commerce, Subcommittee on Health, Testimony A-17-95-00096 (Washington, DC, 1997). See on Medicare’s Physician Fee Schedule, by Douglas also Catherine Larkin and Aliza Marcus, “Firm Holtz-Eakin, Director of the Congressional Bud- Charged with Medicare Fraud,” Washington Post, get Offi ce, 108th Cong., 2nd sess., May 5, 2004. August 21, 2007, p. D2. 57 Paul B. Ginsburg and Joy M. Grossman, “When 62 Kleinke, “Dot-Gov” (see note 24). See also Steve the Price Isn’t Right: How Inadvertent Payment Lohr, “Who Pays for Effi ciency?” New York Times, Incentives Drive Medical Care,” Health Aff airs, June 11, 2007, p. H1. Web Exclusive, August 9, 2005.

100 End Notes:

63 Th e “California Delegated Model,” for which 71 Vanessa Fuhrmans, “A Novel Plan Helps Hospital Pay for Performance was developed, is defi ned Wean Itself Off Pricey Tests,” Wall Street Journal, and discussed in Allan Baumgarten, “California January 12, 2007, p. A1. Health Care Market Report 2005,” California HealthCare Foundation, September 2005, http:// 72 Robert Pear, “Medicare, in a Diff erent Tack, www.chcf.org/documents/hospitals/CAHealth- Moves to Link Doctors’ Payments to Perfor- CareMarketRep2005.pdf. mance,” New York Times, December 12, 2006, p. A27. Medicare has recently taken steps under 64 On October 13, 2004, CBO Director Doug- administrative authority to cease reimbursing the las Holtz-Eakin wrote to Senator Don Nickles, extra costs for preventable errors. Robert Pear, Chairman of the Senate Budget Committee: “Medicare Says It Won’t Cover Hospital Errors,” “According to CBO’s analysis, there is insuffi - New York Times, August 19, 2007, p. 1. cient evidence to conclude that disease manage- ment programs can generally reduce overall health 73 Stephanie Saul, “Profi t and Questions as Doc- spending.” Th is generally refers to disease man- tors Off er Prostate Cancer Th erapy,” New York agement programs that are independent of general Times, December 1, 2006, p. A1; Stephanie Saul, medical care, and not to disease management pro- “High-Profi le Doctor to Leave Position at Cleve- grams embedded in primary care. Douglas Holtz- land Clinic,” New York Times, February 10, 2006, Eakin, Director of the U.S. Congressional Budget p. C3; Reed Ableson and Stephanie Saul, “Ties Offi ce, Letter to Senator Don Nickles, Chairman of to Industry Cloud a Clinic’s Mission,” New York the Senate Budget Committee, October 13, 2004, Times, December 17, 2005, p. C1; David Kocie- http://www.cbo.gov/ftpdocs/59xx/doc5909/10-13- niewski, “New Jersey Med School Board Faces DiseaseMngmnt.pdf. Ethics Charges,” New York Times, September 23, 2005, p. B1; Reed Ableson, “Drug Sales Bring 65 Peter J. Greco and John M. Eisenberg, “Chang- Huge Profi ts, and Scrutiny, to Cancer Doctors,” ing Physicians’ Practices,” New England Journal of New York Times, January 26, 2003, sec. 1, p. 1; Medicine 329, no. 17 (1993): pp. 1271-1274. Walt Bogdanich, “Confl ict Case at Hospitals Is Settled,” New York Times, January 25, 2007, p. 66 Common Good, “Healthcare: Momentum for C1; Gardiner Harris and Janet Roberts, “A State’s Special Health Courts is Building…” http:// Files Put Doctors’ Ties to Drug Makers on Close cgood.org/healthcare.html (accessed December View, New York Times, March 21, 2007, p. A1; 18, 2006). Joseph S. Ross et al., “Pharmaceutical Company 67 Daniel P. Kessler and Mark McClellan, “Do Doc- Payments to Physicians: Early Experiences with tors Practice Defensive Medicine?” Quarterly Jour- Disclosure Laws in Vermont and Minnesota, nal of Economics 111, no. 2 (1996): pp. 353-390. Journal of the American Medical Association 297, no. 11 (2007): pp. 1216-1223; Troyen A. Brennan 68 Per Economic Report of the President, the average and Michelle M. Mello, “Sunshine Laws and the weekly earnings for hourly workers in private non- Pharmaceutical Industry,” Journal of the Ameri- agricultural employment in 2005 came to $27,533 can Medical Association 297, no. 11 (2007): pp. per year on a 50-week-per-year basis. U.S. Coun- 1255-1257; Gardiner Harris, “F.D.A. Limits Role cil of Economic Advisers, 2006 Economic Report of Advisers Tied to Industry,” New York Times, of the President (Washington, DC: Government March 22, 2007, p. A1; Gardiner Harris and Janet Printing Offi ce, 2006), appendix B, p. 338, table Roberts, “After Sanctions, Doctors Get Drug B47: row “December 2005.” Company Pay,” New York Times, June 3, 2007, sec. 1, p. 1. 69 Committee on Quality of Health Care in Amer- ica, Institute of Medicine of the National Acad- 74 Alex Berenson and Andrew Pollack, “Doctors emies, Crossing the Quality Chasm (see note 30). Reaping Millions for Use of Anemia Drugs,” New York Times, May 9, 2007, p. A1; Gardiner Harris, 70 Robert Pear, “Groups Off er Health Plan for Cov- Benedict Carey, and Janet Roberts, “Psychiatrists, erage of Uninsured,” New York Times, January 19, Troubled Children and Drug Industry’s Role,” 2007, p. A21.

101 End Notes:

New York Times, May 10, 2007, p. A1; David 83 Denise Grady, “Second Drop in Cancer Deaths Armstrong, “Medicare Moves to Cut ‘Self Refer- Could Point to a Trend, Researchers Say,” New ral’ Practice,” Wall Street Journal, September 12, York Times, January 18, 2007, p. A14. 2007, p. B1. 84 N. R. Kleinfi eld, “Diabetes and Its Awful Toll 75 McGlynn et al., “Quality of Health Care” (see Quietly Emerge as a Crisis,” New York Times, note 11). January 9, 2006, p. A28; Cathryn M. Delude, “Unlocking the Diabetes-Heart-Disease Connec- 76 George C. Halvorson, “Epilogue: Prepaid Group tion,” New York Times, January 10, 2006, p. F6; N. Practice and Computerized Caregiver Support R. Kleinfi eld, “Living at an Epicenter of Diabetes, st Tools,” in Toward a 21 Century Health System: Th e Defi ance and Despair,” New York Times, Janu- Contributions and Promise of Prepaid Group Prac- ary 10, 2006, p. A1; Urbina, “In the Treatment tice, eds. Alain C. Enthoven and Laura A. Tol- of Diabetes” (see note 81); Marc Santora, “East len (San Francisco: Jossey-Bass, 2004), pp. 249- Meets West, Adding Pounds and Peril,” New York 264; Ateev Mehrotra, Arnold M. Epstein, and Times, January 12, 2006, p. A1. Meredith B. Rosenthal, “Do Integrated Medical Groups Provide Higher-Quality Medical Care 85 R. Adams Dudley et al., “Selective Referral to Th an Individual Practice Associations?” Annals of High-Volume Hospitals: Estimating Potentially Internal Medicine 145, no. 11 (2006): pp. 826-833; Avoidable Deaths,” Journal of the American Medical Jonathan D. Ketcham, Laurence C. Baker and Association 283, no. 9 (2000): pp. 1159-1166. Donna MacIsaac, “Physician Practice Size and Variations in Treatments and Outcomes: Evidence 86 Elliott S. Fisher et al., “Th e Implications of Re- from Medicare Patients with AMI,” Health Aff airs gional Variations in Medicare Spending,” pts. 26, no. 1 (2007): pp. 195-205. 1 and 2, Annals of Internal Medicine 138, no. 4 (2003): pp. 273-298. 77 Stephen M. Shortell and Julie Schmittdiel, “Pre- paid Groups and Organized Delivery Systems: 87 RAND Health, “Redefi ning and Reforming Promise, Performance, and Potential,” chap. 1 in Health Care for the Last Years of Life,” RAND Enthoven and Tollen, Toward a 21st Century Health Corporation, 2006, http://www.rand.org/pubs/re- System, pp. 1-21 (see note 76). search_briefs/2006/RAND_RB9178.pdf. 78 Kleinke, “Dot-Gov” (see note 24). 88 John E. Wennberg and the Dartmouth Atlas Working Group, “Th e Dartmouth Atlas of Health 79 Victor R. Fuchs, Th e Health Economy (Cambridge, Care: Research Agenda & Findings,” Center for MA: Harvard University Press, 1986). Evaluative Clinical Sciences at Dartmouth Medi- cal School, http://www.dartmouthatlas.org/agen- 80 James G. Kahn et al., “Th e Cost of Health Insur- da.shtm (accessed January 11, 2007). ance Administration in California: Estimates for Insurers, Physicians, and Hospitals,” Health Aff airs 89 Institute for Clinical Systems Improvement, 24, no. 6 (2005): pp. 1629-1639. And this does “Guidelines & More,” www.icsi.org/index.asp not include employers’ costs to manage their end (accessed January 11, 2007); Kaiser Permanente of the insurance purchase. Care Management Institute, “Clinical Practice Guidelines,” Kaiser Permanente, http://members. 81 Ian Urbina, “In the Treatment of Diabetes, Suc- kaiserpermanente.org/kpweb/clinicalpracguide/ cess Often Does Not Pay,” New York Times, Janu- entrypage.do (accessed January 11, 2007). ary 11, 2006, p. A1. 90 U.S. Department of Veterans Aff airs, “VA Qual- 82 Erik Eckholm, “To Lower Costs” (see note 16); ity Enhancement Research Initiative (QUERI),” John Carreyrou, “How a Hospital Stumbled http://www1.va.gov/hsrd/QUERI (accessed Janu- Across an Rx for Medicaid,” Wall Street Journal, ary 11, 2007). June 22, 2006, p. A1.

102 End Notes:

91 National Committee for Quality Assurance, Aff ect Cost of Insurance, Report to the Honorable “Homepage,” www.ncqa.org (accessed January 11, James M. Jeff ords, U.S. Senate, GAO/HEHS-96- 2007). 161 (Washington, DC, 1996); and Christopher J. Conover, “Health Care Regulation: A $169 Bil- 92 Naik, “In Holland, Some See Model” (see note lion Hidden Tax,” Policy Analysis (Cato Institute), 23). 2004, no. 527. 93 Th is description was provided by David Riemer of 101 M. A. Hall, “Th e Geography of Health Insurance the Wisconsin Health Project, whose contribution Regulation,” Health Aff airs 19, no. 2 (2000): p. 177. is gratefully acknowledged. “…the need to seek regulatory approval in each 94 Alain C. Enthoven, “Th e History and Principles state whenever even small changes are made in in- of Managed Competition,” Health Aff airs 12, surance products may discourage frequent product supplement 1 (1993): pp. 24-48. innovations.” 95 Ibid. 102 K. Davis and C. Schoen, “Assuring Quality, In- formation, and Choice in Managed Care,” Inquiry 96 Henry J. Kaiser Family Foundation and the 35, no. 2 (1998): pp. 104-114; Atul A. Gawande et Health Research and Educational Trust, 2007 An- al., “Does Dissatisfaction with Health Plans” (see nual Survey (see note 31). note 45); Alain C. Enthoven, Helen H. Schauf- fl er, and Sara McMenamin, “Consumer Choice 97 Recall that the Group Health Cooperative of and the Managed Care Backlash,” American Jour- Puget Sound was found in one study to deliver nal of Law and Medicine 27, no. 1 (2001): pp. 1-15. high-quality care for 28 percent less cost than the fee-for-service sector in the same area. Newhouse 103 Donald J. Palmisano, David W. Emmons, and the Insurance Experiment Group, Free for All? and Gregory D. Wozniak, “Expanding Insur- (see note 35). ance Coverage Th rough Tax Credits, Consumer Choice, and Market Enhancements: Th e Ameri- 98 John Sheils, Randall Haught, and Evelyn Murphy, can Medical Association Proposal for Health “Cost and Coverage Estimates for the ‘Healthy Insurance Reform,” Journal of the American Medical Americans Act’” (working paper, Lewin Group, Association 291, no. 18 (2004): pp. 2237-2242. Falls Church, VA, December 12, 2006), http:// wyden.senate.gov/Healthy_Americans_Act/ 104 Roger T. Johnson, Historical Beginnings…the HAA_Cost_Coverage_Report.pdf. Federal Reserve (Boston: Federal Reserve Bank of Boston, 1999); Ann-Marie Meulendyke, “Th e 99 Advocates of extension of the FEHB to the gener- Federal Reserve and U.S. Monetary Policy: A al population have included Senators John Kerry, Short History,” chap. 2 in U.S. Monetary Policy Bill Frist, and Bill Bradley. An early, perhaps the and Financial Markets (New York: Federal Reserve earliest, discussion of this idea in print was Odin Bank of New York, 1998). W. Anderson and J. Joel May, Th e Federal Employ- ees Health Benefi ts Program, 1961-1968, A Model 105 Th is section of the Statement consists largely of for National Health Insurance? (Chicago: Center excerpts and paraphrases from an as yet unpub- for Health Administration Studies, University of lished manuscript by Ezekiel Emanuel, Victor Chicago, 1971). R. Fuchs, and Alan M. Garber entitled “Better Information for Better Health Care Decisions: A 100 U.S. General Accounting Offi ce, Private Health Proposal to Create an Institute for Medical Out- Insurance: Federal and State Requirements Aff ect- comes and Technology Assessment.” Th eir contri- ing Coverage Off ered by Small Businesses, Report to bution is gratefully acknowledged. Congressional Requester, GAO-03-1133 (Wash- ington, DC, 2003), p. 2. “For example, 7 states 106 Louise B. Russell, “Th e Diff usion of New Hos- each had 30 or more benefi t mandates, while 5 pital Technologies in the United States,” Inter- states each had fewer than 10 benefi t mandates.” national Journal of Health Sciences 6, no. 4 (1976): See also U.S. General Accounting Offi ce, Health pp. 557-580; J. P. Bunker, J. Fowles, and R. Insurance Regulation: Varying State Requirements Schaff arzick, “Evaluation of Medical-Technology

103 End Notes:

Strategies: Proposal for an Institute for Health- 113 For a catalogue of the defects, see Alain C. En- Care Evaluation,” pt. 2, New England Journal of thoven and Victor R. Fuchs, “Employment-Based Medicine 306, no. 11 (1982): pp. 687-92; V. Fuchs Health Insurance: Past, Present, and Future,” and A. Garber, “Th e New Technology Assess- Health Aff airs 25, no. 6 (2006): pp. 1538-1547. ment,” New England Journal of Medicine 323, no. 114 U.S. Department of Labor, Employment and 10 (1990): pp. 673-677; Uwe E. Reinhardt, “An Training Administration, “Trade Adjustment As- Information Infrastructure for the Pharmaceutical sistance (TAA) and Alternative Trade Adjustment Market,” Health Aff airs 23, no. 1 (2004): pp. 107- Assistance (ATAA) Services and Benefi ts,” U.S. 112; Gail R. Wilensky, “Developing a Center for Department of Labor, http://www.doleta.gov/ Comparative Eff ectiveness Information,” Health tradeact/benefi ts.cfm (accessed June 8, 2007). Aff airs, Web Exclusive, November 7, 2006. 115 Th omas M. Selden and Bradley M. Gray, “Tax 107 Bradford H. Gray, Michael K. Gusmano, and Subsidies for Employment-Related Health Insur- Sara Collins, “AHCPR and the Changing Politics ance: Estimates for 2006,” Health Aff airs 25, no. 6 of Health Services Research,” Health Aff airs, Web (2006): pp. 1568-1579. Exclusive, June 25, 2003. 116 Research and Policy Committee of the Com- 108 John Holahan, Allison Cook, and Lisa Dubay, mittee for Economic Development, A New Tax “Characteristics of the Uninsured: Who Is Eli- Framework: A Blueprint for Averting a Fiscal Crisis gible for Public Coverage and Who Needs Help (New York and Washington, DC: Committee for Aff ording Coverage?” Kaiser Commission on Economic Development, 2002). Medicaid and the Uninsured, Henry J. Kaiser Family Foundation, February 2007, http://www. 117 Research and Policy Committee of the Commit- kff .org/uninsured/upload/7613.pdf. tee for Economic Development, New Vision for Health Care (see note 1). 109 Elliot K. Wicks, Mark A. Hall, and Jack A. Mey- er, “Barriers to Small-Group Purchasing Coopera- 118 E. L. Hannan et al., “Improving the Outcomes tives,” Economic and Social Research Institute, of Coronary Artery Bypass Surgery in New York March 2000, http://www.esresearch.org/Docu- State,” Journal of the American Medical Association ments/HPC.pdf; Rick Curtis and Ed Neuschler, 271, no. 10 (1994): pp. 761-766. “What Health Insurance Pools Can and Can’t Do,” California HealthCare Foundation, Novem- 119 M. Susan Marquis and Stephen H. Long, “Trends ber 2005, www.chcf.org/topics/healthinsurance/ in Managed Care and Managed Competition, index.cfm?itemID=117082. 1993-97,” Health Aff airs 18, no. 6 (1999): pp. 75- 88. 110 U.S. General Accounting Offi ce, Private Health Insurance: Small Employers Continue to Face Chal- 120 James Maxwell and Peter Temin, “Managed lenges in Providing Coverage, report to the Ranking Competition Versus Industrial Purchasing of Minority Member, Committee on Small Business Health Care Among the Fortune 500,” Journal of and Entrepreneurship, U.S. Senate, GAO-02-8 Health Politics, Policy and Law 27, no. 1 (2002): pp. (Washington, DC, 2001). 5-30. 111 Pacifi c Business Group on Health, “PacAdvantage 121 Henry J. Kaiser Family Foundation and the Will No Longer Provide Access to Health Insur- Health Research and Educational Trust, 2007 An- ance Off erings,” press release, August 11, 2006. nual Survey (see note 31). 112 U.S. Congressional Research Service, Th e Advisory 122 Th e following text is our own distillation, based Panel’s Tax Reform Proposals, by Jane G. Gravelle, upon Charles D. Weller, “‘Free choice’ as a Re- CRS Report for Congress, RL33545 (Washing- straint of Trade in American Health Care Deliv- ton, DC, 2006). ery and Insurance,” Iowa Law Review 69, no. 5 (1983): pp. 1351-1378, and 1382-1392; and also Paul Starr, Th e Social Transformation of American Medicine (New York: Basic Books, 1982).

104 End Notes:

123 Starr, Social Transformation of American Medicine 129 Kevin Helliker and Lauren Etter, “Silent Treat- (see note 122). ment: Hysterectomy Alternative Goes Unmen- tioned to Many Women,” Wall Street Journal, 124 U.S. Federal Trade Commission, Bureau of Eco- August 24, 2004, p. A1. nomics, Physician Control of Blue Shield Plans, by David I. Kass and Paul A. Pautler, Staff Report 130 J. Bruce Moseley et al., “A Controlled Trial of Ar- of the Bureau of Economics to the Federal Trade throscopic Surgery for Osteoarthritis of the Knee,” Commission (Washington, DC, 1979). New England Journal of Medicine 347, no. 2 (2002): pp. 81-88. 125 S. Myers and N. Gleicher, “A Successful Program to Lower Cesarean-Section Rates,” New England 131 Andrea Obernosterer et al., “Th romboembolic Journal of Medicine 319, no. 23 (1988): pp. 1511- Events Following Arthroscopic Knee Surgery,” 1516; F. C. Battaglia, “Reducing the Cesarean Journal of the American Medical Association 282, no. Section Rate Safely,” New England Journal of Med- 5 (1999): p. 431; Kristian Aagaard Poulsen, Lars icine 319, no. 23 (1988); A. L. Siu et al., “Inap- C. Borris, and Michael R. Lassen, “Th romboem- propriate Use of Hospitals in a Randomized Trial bolic Complications After Arthroscopy of the of Health Insurance Plans,” New England Journal Knee,” Arthroscopy 9, no. 5 (1993): pp. 570-573. of Medicine 31, no. 20 (1986): pp. 1259-1266; C. M. Winslow et al., “Th e Appropriateness of Per- 132 Anissa A. Orr and Baylor College of Medicine, forming Coronary Artery Bypass Graft Surgery,” “Study Finds Common Knee Surgery No Better Journal of the American Medical Association 260, no. than Placebo,” EurekAlert! Th e American As- 4 (1988): pp. 505-509; M. R. Chassin et al., “Does sociation for the Advancement of Science, http:// Inappropriate Use Explain Geographic Variations www.eurekalert.org/pub_releases/2002-07/bcom- in the Use of Health Care Services? A Study of sfc070802.php (accessed December 18, 2006). Th ree Procedures,” Journal of the American Medical 133 Robert W. Jackson, “Debate on the Use of Ar- Association 258, no. 18 (1987): pp. 2533-2537; L. throscopic Surgery for Osteoarthritis of the Knee,” C. Kleinman et al., “Th e Medical Appropriateness Baylor University Medical Center Proceedings 16, no. of Tympanostomy Tubes Proposed for Children 1 (2003): pp. 27-29, http://www.pubmedcentral. Younger Th an 16 Years in the United States,” nih.gov/articlerender.fcgi?artid=1200806. Journal of the American Medical Association 271, no. 16 (1994): pp. 1250-1255; C. M. Winslow et al., 134 Dudley et al., “Selective Referral to High-Volume “Th e Appropriateness of Carotid Endarterecto- Hospitals;” H. S. Luft, J. P. Bunker, and A. C. my,” New England Journal of Medicine 318, no. 12 Enthoven, “Should Operations Be Regionalized? (1988): pp. 721-727; Kessler and McClellan, “Do Th e Empirical Relation Between Surgical Volume Doctors Practice Defensive Medicine?” (see note and Mortality,” New England Journal of Medicine 67). 301, no. 25 (1979): pp. 1364-1369; Mark R. Chas- sin, “Achieving and Sustaining Improved Quality: 126 Wennberg and Gittelsohn, “Variations in Medical Lessons from New York State and Cardiac Sur- Care” (see note 13); Wennberg et al., “Changes in gery,” Health Aff airs 21, no. 4 (2002): pp. 40-51. Tonsillectomy Rates” (see note 13). 135 Hoff man, Rice, and Sung, “Persons with Chronic 127 John E. Wennberg, “Dealing with Medical Prac- Conditions” (see note 50). A recent study by a tice Variations: A Proposal for Action,” Health Af- team at Johns Hopkins estimated that 83 percent fairs 3, no. 2 (1984): pp. 6-32. of U.S. health-care spending is on people with at 128 Th e Center for the Evaluative Clinical Sciences, least one chronic condition. Johns Hopkins Uni- Dartmouth Medical School, Th e Quality of Medical versity and the Robert Wood Johnson Foundation, Care in the United States: A Report on the Medicare “Chronic Conditions” (see note 29). Program (Chicago: Health Forum, Inc., 1999). 136 Committee on Quality Health Care in America, Institute of Medicine of the National Academies, Crossing the Quality Chasm (see note 30).

105 End Notes:

137 Brown, Report on the Financial Statement Audit (see 142 U.S. Executive Offi ce of the President, Council note 61). See also Carrie Johnson, “Medicare’s on Wage and Price Stability, A Study of Physicians’ $869 Air Mattress Bill; Government Arrests 38 as Fees, by Zachary Dykman (Washington, DC, It Cracks Down on Health-Care Fraud,” Washing- 1978). Th is source is quoted in: Enthoven, Health ton Post, May 10, 2007, p. D1; U.S. Government Plan, p. 106 (see note 39). Accountability Offi ce, “Major Management Chal- lenges at the Department of Health and Human 143 Helliker and Etter, “Silent Treatment” (see note Services,” http://www.gao.gov/pas/2005/hhs.htm 129). (accessed September 18, 2007); and U.S. De- 144 Jason S. Lee and Laura Tollen, “How Low Can partment of Health and Human Services, “CMS You Go? Th e Impact of Reduced Benefi ts and Financial Report: Fiscal Year 2006,” http://www. Increased Cost Sharing,” Health Aff airs, Web Ex- cms.hhs.gov/CFOReport/Downloads/2006_ clusive, June 19, 2002. CMS_Financial_Report.pdf (accessed September 18, 2007). 145 Wisconsin Health Project, “Understanding the Plan,” http://www.wisconsinhealthproject.org/ 138 Brown, Report on the Financial Statement Audit plan/understanding.htm (accessed June 8, 2007). (see note 61). 146 See, for example, Sara J. Singer, Alan M. Garber, 139 Ibid. and Alain C. Enthoven, “Near-Universal Cover- 140 Sparrow, License to Steal (see note 38). age Th rough Health Plan Competition: An Insur- ance Exchange Approach,” in Covering America: 141 U.S. Department of Health and Human Services, Real Remedies for the Uninsured, vol. 1, eds. Jack Health Care Finance Administration, Volume- A. Meyer and Elliot K. Wicks (Washington, DC: and-Intensity Response Team, Offi ce of the Actu- Economic and Social Research Institute, 2001), ary, Estimated Volume-and-Intensity Response to a pp. 155-171. Price Change for Physicians’ Services, Memorandum to Richard S. Foster, Chief Actuary, (Washing- 147 Professor Wynand van de Ven of Erasmus Uni- ton, DC, 1998), http://www.cms.hhs.gov/Actuari- versity, Rotterdam, provided the information alStudies/downloads/PhysicianResponse.pdf. on the Dutch plan. His assistance is gratefully acknowledged.

106 CED Trustees

Co-Chairs CHARLES E.M. KOLB DEBORAH HICKS BAILEY President Chairman & CEO W. BOWMAN CUTTER Committee for Economic Development Solon Group, Inc. Managing Director Warburg Pincus LLC WILLIAM W. LEWIS EDWARD N. BASHA, JR. Director Emeritus Chief Executive Offi cer RODERICK M. HILLS McKinsey Global Institute Basha Grocery Stores Chairman McKinsey & Company, Inc. Hills Stern & Morley LLP NADINE BASHA BRUCE K. MACLAURY Chair President Emeritus Arizona Early Childhood Development Executive Committee Th e Brookings Institution and Health Board IAN ARNOF STEFFEN E. PALKO ALAN BELZER Chairman Vice Chairman & President (Retired) President & Chief Operating Offi cer Arnof Family Foundation XTO Energy (Retired) Allied Signal PETER BENOLIEL DONALD K. PETERSON Chairman Emeritus Chairman & CEO (Retired) DEREK C. BOK Quaker Chemical Corporation Avaya Inc. Interim President Harvard University ROY J. BOSTOCK DONNA SHALALA Chairman President LEE C. BOLLINGER Sealedge Investments, LLC University of Miami President Columbia University FLETCHER L. BYROM FREDERICK W. TELLING President & CEO Vice President, Corporate Strategic Planning STEPHEN W. BOSWORTH MICASU Corporation Pfi zer Inc. Dean Fletcher School of Law and Diplomacy FRANK P. DOYLE JOSH S. WESTON Tufts University Executive Vice President (Retired) Honorary Chairman General Electric Company Automatic Data Processing, Inc. JACK O. BOVENDER Chairman & CEO EDMUND B. FITZGERALD RONALD L. ZARRELLA HCA-Health Care Corporation of Managing Director Chairman & CEO America Woodmont Associates Bausch & Lomb JOHN BRADEMAS JOSEPH GANTZ President Emeritus Partner New York University GG Capital, LLC Board of Trustees RANDY J. BRAUD PATRICK W. GROSS KENT M. ADAMS U.S. Country Controller Chairman President Shell Oil Company Th e Lovell Group. Caterpillar Inc. WILLIAM E. BROCK STEVEN GUNBY PAUL A. ALLAIRE Founder and Senior Partner Chairman, Th e Americas & Senior Vice Chairman (Retired) Th e Brock Group President Xerox Corporation Th e Boston Consulting Group, Inc. STEPHEN E. ALLIS BETH BROOKE Global Vice Chair, Strategy, JAMES A. JOHNSON Partner in Charge of Government Aff airs Communications, Vice Chairman KPMG LLP and Regulatory Aff airs Perseus Capital HERBERT M. ALLISON Ernst & Young, LLP THOMAS J. KLUTZNICK Chairman, President, & CEO ROBERT H. BRUININKS President TIAA-CREF President Th omas J. Klutznick Co. COUNTESS MARIA BEATRICE ARCO University of Minnesota Chair American Asset Corporation

107 CED Trustees

DONALD R. CALDWELL DAVID CRANE W.D. EBERLE Chairman & Chief Executive Offi cer President & CEO Chairman Cross Atlantic Capital Partners NRG Energy, Inc. Manchester Associates, Ltd.

DAVID A. CAPUTO KENNETH W. DAM ROBERT A. ESSNER President Emeritus Max Pam Professor Emeritus of American Chairman, President & CEO Pace University and Foreign Law and Senior Lecturer Wyeth University of Chicago Law School GERHARD CASPER ALLEN I. FAGIN President Emeritus PAUL DANOS Chairman Stanford University Dean, Th e Amos Tuck School of Business Proskauer Rose LLP Dartmouth College RAYMOND G. CHAMBERS KATHLEEN FELDSTEIN Chairman of the Board (Retired) RONALD R. DAVENPORT President Amelior Foundation Chairman of the Board Economics Studies, Inc. Sheridan Broadcasting Corporation ROBERT B. CHESS TREVOR FETTER Chairman RICHARD H. DAVIS President & CEO Nektar Th erapeutics Partner Tenet Healthcare Corporation Davis Manafort, Inc. MICHAEL CHESSER MATTHEW FINK Chairman, President & CEO RICHARD J. DAVIS President (Retired) Great Plains Energy Services Senior Partner Investment Company Institute Weil, Gotshal & Manges LLP CAROLYN CHIN MARGARET FORAN Chairman & Chief Executive Offi cer JOHN J. DEGIOIA Senior Vice President, Corporate Cebiz President Governance, Associate General Council, Georgetown University & Corporate Secretary JOHN L. CLENDENIN Pfi zer Inc Chairman (Retired) RENATO DIPENTIMA BellSouth Corporation President and CEO, Retired PATRICK FORD SRA International, Inc. President & CEO, USA MARTIN COHEN Burson-Marsteller Managing Director and Assistant Secretary SAMUEL A. DIPIAZZA Legal and Compliance Division Global Chief Executive Offi cer HARRY FREEMAN Morgan Stanley PricewaterhouseCoopers LLP Chairman Th e Mark Twain Institute ELIZABETH COLEMAN LINDA M. DISTLERATH, PH.D President Vice President, Global Health Policy MITCHELL S. FROMSTEIN Bennington College Merck & Co., Inc. Chairman Emeritus Manpower Inc. FERDINAND COLLOREDO WILLIAM H. DONALDSON MANSFELD Chairman CONO R. FUSCO Partner Donaldson Enterprises Managing Partner - Strategic Relationships Cabot Properties, LLC Grant Th ornton IRWIN DORROS GEORGE H. CONRADES President PAMELA B. GANN Chairman & Chief Executive Offi cer Dorros Associates President Akamai Technologies Inc. Claremont McKenna College ROBERT H. DUGGER KATHLEEN B. COOPER Managing Director E. GORDON GEE Dean, College of Business Administration Tudor Investment Corporation President University of North Texas Ohio State University T. J. DERMOT DUNPHY DAVID M. COTE Chairman THOMAS P. GERRITY Chairman & CEO Kildare Enterprises, LLC Dean Emeritus Honeywell International Inc. Th e Wharton School of the University of CHRISTOPHER D. EARL, PH.D Pennsylvania President & CEO BIO Ventures for Global Health

108 CED Trustees

ALAN B. GILMAN JOHN HILLEN EDWARD A. KANGAS Chairman President Global Chairman & CEO (Retired) Th e Steak n Shake Company Global Strategies Group (USA) LlC Deloitte Touche Tohmatsu

CAROL R. GOLDBERG JOHN HOFFMEISTER JOSEPH E. KASPUTYS President President Chairman, President & CEO Th e AvCar Group, Ltd. Shell Oil Company Global Insight, Inc.

ALFRED G. GOLDSTEIN G. PENN HOLSENBECK WILLIAM E. KIRWAN President & Chief Executive Offi cer VP, Associate General Counsel & Corporate Chancellor AG Associates Secretary University System of Maryland Altria Group, Inc. JOSEPH T. GORMAN KAKUTARO KITASHIRO Chairman & CEO (Retired) PAUL M. HORN Chairman TRW Inc. Senior Vice President, Research IBM Japan IBM Corporation EARL G. GRAVES YOTARO KOBAYASHI Chairman & Publisher PHILIP K. HOWARD Senior Corporate Advisor and Former Earl G. Graves Publishing Co., Inc. Partner, Senior Corporate Advisor, Chairman and Strategist Fuji Xerox GERALD GREENWALD Covington & Burling Chairman THOMAS F. LAMB, JR. Greenbriar Equity Group SHIRLEY ANN JACKSON Senior Vice President, Government Aff airs President PNC Financial Services Group, Inc. BARBARA B. GROGAN Rensselaer Polytechnic Institute Founder KURT M. LANDGRAF Western Industrial Contractors CHARLENE DREW JARVIS President & CEO President Educational Testing Service JEROME H. GROSSMAN Southeastern University Senior Fellow DAVID LANGSTAFF Kennedy School Health Care Delivery WILLIAM C. JENNINGS Co-Chairman & CEO Project Chairman Olive Group Harvard University US Interactive, Inc. W. MARK LANIER, ESQ. RONALD GRZYWINSKI JEFFREY A. JOERRES Partner Chairman Chairman & CEO Th e Lanier Law Firm P.C. ShoreBank Corporation Manpower Inc. RICK A. LAZIO ADAM J. GUTSTEIN L. OAKLEY JOHNSON Executive Vice President, Global Chief Executive Offi cer Senior Vice President, Corporate Aff airs Government Relations & Public Policy Diamond Management & Technology American International Group, Inc. J.P. Morgan Chase & Co. Consultants, Inc. VAN E. JOLISSAINT ROBERT G. LIBERATORE JUDITH H. HAMILTON Corporate Economist Group Senior Vice President Chairman & CEO (Retired) DaimlerChrysler Corporation Global External Aff airs and Public Policy Classroom Connect DaimlerChrysler Corporation ROBERT L. JOSS WILLIAM HASELTINE Dean, Graduate School of Business JOHN LIFTIN President Stanford University Vice Chairman, General Counsel and Haseltine Associates Secretary PRES KABACOFF Th e Bank of New York RICHARD H. HERSH Chief Executive Offi cer Former President HRI Properties IRA A. LIPMAN Trinity College Founder & Chairman ROBERT KAHN Guardsmark, LLC HEATHER R. HIGGINS Director, Country Risk Management President Citigroup Inc. JOHN C. LOOMIS Randolph Foundation Vice President, Human Resources General Electric Company

109 CED Trustees

LI LU HARVEY R. MILLER CAROL J. PARRY President Managing Director President Himalaya Management Greenhill & Co., LLC Corporate Social Responsibility Associates EUGENE LUDWIG ALFRED T. MOCKETT Chief Executive Offi cer Chairman & CEO GREGG PETERSMEYER Promontory Financial Group Motive, Inc. Senior Chairman Th e Blackstone Group COLETTE MAHONEY AVID MODJTABAI President Emeritus Executive Vice President and VICTOR A. PELSON Marymount Manhattan College Chief Information Offi cer Senior Advisor Wells Fargo & Co. UBS Securities LLC ELLEN R. MARRAM President G. MUSTAFA MOHATAREM PETER G. PETERSON Barnegat Group LLC Chief Economist Senior Chairman General Motors Corporation Th e Blackstone Group CECILIA MARTINEZ Executive Director JAMES MOODY TODD E. PETZEL Th e Reform Institute Senior Financial Advisor Managing Director and Chief Investment Merrill Lynch & Co., Inc. Offi cer DAVID MAXWELL Azimuth Trust Management, LLC President NICHOLAS G. MOORE Drake University Senior Counsel and Director DOUG PRICE Bechtel Group, Inc. Founder T. ALLAN MCARTOR Educare Colorado Chairman DONNA S. MOREA Airbus of North America, Inc. President, US Operations & India GEORGE A. RANNEY, JR. CGI President & CEO ALONZO L. MCDONALD Chicago Metropolis 2020 Chairman & Chief Executive Offi cer JAMES C. MULLEN Avenir Group, Inc. President & CEO NED REGAN Biogen Idec Inc. University Professor WILLIAM J. MCDONOUGH Th e City University of New York Vice Chairman and Special Advisor DIANA S. NATALICIO to the Chairman President E.B. ROBINSON, JR. Merrill Lynch & Co., Inc. Th e University of Texas at El Paso Chairman (Retired) Deposit Gurantee Corporation DAVID E. MCKINNEY MATTHEW NIMETZ Vice Chair Managing Partner JAMES D. ROBINSON III Th omas J. Watson Foundation General Atlantic LLC Partner RRE Ventures SUSAN R. MEISINGER DEAN R. O’HARE President & Chief Executive Offi cer Chairman & CEO, (Retired) JAMES E. ROHR Society for Human Resource Th e Chubb Corporation Chairman & CEO Management PNC Financial Services Group, Inc. RONALD L. OLSON CAROL MELTON Partner ROY ROMER Executive Vice President, Global Public Munger, Tolles & Olson LLP Superintendent of Schools (Retired) Policy LA Unifi ed School District Time Warner Inc. M. MICHEL ORBAN Partner DANIEL ROSE LENNY MENDONCA RRE Ventures Chairman Chairman Rose Associates, Inc. McKinsey Global Institute JERRY PARROTT McKinsey & Company, Inc. V.P., Corporate Communications LANDON H. ROWLAND and Public Policy Chairman ALAN G. MERTEN Human Genome Sciences, Inc. EverGlades Financial President George Mason University

110 CED Trustees

NEIL L. RUDENSTINE JAMES D. STALEY FRANK VOGL Chair, ArtStor Advisory Board President & CEO President Andrew W. Mellon Foundation YRC Regional Transportation Vogl Communications

GEORGE E. RUPP PAULA STERN DONALD C. WAITE President Chairwoman Director International Rescue Committee Th e Stern Group, Inc. McKinsey & Company, Inc.

EDWARD B. RUST DONALD M. STEWART JERRY D. WEAST Chairman & CEO Professor Superintendent of Schools State Farm Insurance Companies Th e University of Chicago Montgomery County Public Schools

ARTHUR F. RYAN ROGER W. STONE JOHN P. WHITE President, Chairman & CEO Chairman Lecturer in Public Policy Prudential Financial Roger and Susan Stone Family Harvard University Foundation BERTRAM L. SCOTT HAROLD M. WILLIAMS President MATTHEW J. STOVER President Emeritus TIAA-CREF Life Insurance Company Chairman Getty Trust LKM Ventures, LLC JOHN E. SEXTON LINDA SMITH WILSON President LAWRENCE H. SUMMERS President Emerita New York University Managing Director Radcliff e College Shaw & Co., L.P. WALTER H. SHORENSTEIN Charles W. Elliot University Professor MARGARET S. WILSON Chairman of the Board Harvard University Chairman & CEO Shorenstein Company LLC Scarbroughs HENRY TANG GEORGE P. SHULTZ Governor H. LAKE WISE Distinguished Fellow Committee of 100 Executive Vice President and Chief Legal Th e Hoover Institution Offi cer JAMES A. THOMSON Daiwa Securities America Inc. JOHN C. SICILIANO President & Chief Executive Offi cer Partner RAND JACOB J. WORENKLEIN Grail Partners LLC Chief Executive Offi cer STEPHEN JOEL TRACHTENBERG US Power Generating Company, LLC FREDERICK W. SMITH President Chairman, President & CEO George Washington University KURT E. YEAGER FedEx Corporation President Emeritus TALLMAN TRASK, III Electric Power Research Institute SARAH G. SMITH Executive Vice President Chief Accounting Offi cer Duke University RONALD L. ZARRELLA Goldman Sachs Group Inc. Chairman & CEO VAUGHN O. VENNERBERG Bausch & Lomb Inc. IAN D. SPATZ Senior Vice President and Chief of Staff Vice President, Public Policy XTO Energy Inc. STEVEN ZATKIN Merck & Co., Inc. Senior Vice President, Government Relations ROBERT J. VILHAUER Kaiser Foundation Health Plan, Inc. STEVEN SPECKER Vice President, Public Policy and Analysis Chairman & Chief Executive Offi cer Th e Boeing Company EDWARD J. ZORE Electric Power Research Institute President & CEO JAMES L. VINCENT Northwestern Mutual ALAN G. SPOON Chairman (Retired) Managing General Partner Biogen Inc. Polaris Venture Partners

111 CED Honorary Trustees

RAY C. ADAM RALPH P. DAVIDSON PHILIP M. HAWLEY Retired Chairman Retired Chairman Retired Chairman of the Board NL Industries Time Inc. Carter Hawley Hale Stores, Inc.

ROBERT O. ANDERSON ALFRED C. DECRANE, JR. ROBERT C. HOLLAND Retired Chairman Retired Chairman Senior Fellow Hondo Oil & Gas Company Texaco Corporation Th e Wharton School of the University of Pennsylvania ROY L. ASH ROBERT R. DOCKSON Retired Chairman Chairman Emeritus LEON C. HOLT, JR. Litton Industries CalFed, Inc. Retired Vice Chairman and Chief Administrative Offi cer ROBERT H. BALDWIN LYLE J. EVERINGHAM Air Products and Chemicals, Inc. Retired Chairman Retired Chairman Morgan Stanley Th e Kroger Co. SOL HURWITZ Retired President GEORGE F. BENNETT THOMAS J. EYERMAN Committee for Economic Development Chairman Emeritus Retired Partner State Street Investment Trust Skidmore, Owings & Merrill GEORGE F. JAMES

JACK F. BENNETT DON C. FRISBEE DAVID T. KEARNS Retired Senior Vice President Chairman Emeritus Chairman Emeritus ExxonMobil Corporation Pacifi Corp New American Schools Development Corporation HOWARD BLAUVELT RICHARD L. GELB Chairman Emeritus GEORGE M. KELLER ALAN S. BOYD Bristol-Myers Squibb Company Retired Chairman of the Board Retired Vice Chairman Chevron Corporation Airbus Industrie North America W. H. K. GEORGE Retired Chairman FRANKLIN A. LINDSAY ANDREW F. BRIMMER ALCOA Retired Chairman President Itek Corporation Brimmer & Company, Inc. WALTER B. GERKEN Retired Chairman & Chief Executive Offi cer ROBERT W. LUNDEEN PHILIP CALDWELL Pacifi c Investment Management Co. Retired Chariman Retired Chairman Th e Dow Chemical Company Ford Motor Company LINCOLN GORDON Former President RICHARD B. MADDEN HUGH M. CHAPMAN Johns Hopkins University Retired Chairman & Chief Executive Offi cer Retired Chairman Potlatch Corporation Nations Bank of Georgia JOHN D. GRAY Chairman Emeritus AUGUSTINE R. MARUSI E. H. CLARK, JR. Hartmarx Corporation Retired Chairman Chairman & Chief Executive Offi cer Borden Inc. Th e Friendship Group JOHN R. HALL Retired Chairman WILLIAM F. MAY A. W. CLAUSEN Ashland Inc. Former Chairman & CEO Retired Chairman & Chief Executive Offi cer Statue of Liberty-Ellis Island Foundation Bank of America RICHARD W. HANSELMAN Former Chairman OSCAR G. MAYER DOUGLAS D. DANFORTH Health Net Inc. Retired Chariman Executive Associates Oscar Mayer & Co. ROBERT S. HATFIELD JOHN H. DANIELS Retired Chairman JOHN F. MCGILLICUDDY Retired Chairman & CEO Th e Continental Group Retired Chairman & Chief Executive Offi cer Archer Daniels Midland Company J.P. Morgan Chase & Co.

112 CED Honorary Trustees

JAMES W. MCKEE, JR. DEAN P. PHYPERS ELMER B. STAATS Retired Chairman Retired Chief Financial Offi cer Former Comptroller General CPC International, Inc. IBM Corporation of the United States

CHAMPNEY A. MCNAIR ROBERT M. PRICE FRANK STANTON Retired Vice Chairman Retired Chairman & Chief Executive Offi cer Retired President Trust Company of Georgia Control Data Corporation CBS Corporation

J. W. MCSWINEY JAMES J. RENIER EDGER B. STERN, JR. Retired Chairman of the Board Retired Chairman & CEO Chairman of the Board MeadWestvaco Corporation Honeywell Inc. Royal Street Corporation

ROBERT E. MERCER JAMES Q. RIORDAN ALAXANDER L. STOTT Retired Chairman Chairman Retired President & COO Th e Goodyear Tire & Rubber Company Quentin Partners Co. GTE CorpoRation

RUBEN F. METTLER IAN M. ROLLAND WAYNE E. THOMPSON Retired Chairman & Chief Executive Offi cer Retired Chairman & Chief Executive Offi cer Retired Chairman TRW, Inc. Lincoln National Corporation Merritt Peralta Medical Center

LEE L. MORGAN AXEL G. ROSIN THOMAS A. VANDERSLICE Retired Chairman of the Board Retired Chairman Caterpillar Inc. Book-of-the-Month Club, Inc. SIDNEY J. WEINBERG, JR. Senior Director ROBERT R. NATHAN WILLIAM M. ROTH Goldman Sachs Group Inc. Chairman Nathan Associates THE HONORABLE WILLIAM CLIFTON R. WHARTON, JR. RUDER Former Chairman & CEO JAMES J. O’CONNOR Former US Assistant Secretary of Commerce TIAA-CREF Retired Chairman & Chief Executive Offi cer Exelon Corporation RALPH S. SAUL DOLORES D. WHARTON Retired Chairman of the Board Former Chairman & CEO LEIF H. OLSEN CIGNA Corporation Th e Fund for Corporate Initiatives Chairman LHO Group GEORGE A. SCHAEFER ROBERT C. WINTERS Retired Chairman of the Board Chairman Emeritus NORMA PACE Caterpillar Inc. Prudential Financial President Paper Analytics Associates ROBERT G. SCHWARTZ RICHARD D. WOOD Retired Chief Executive Offi cer CHARLES W. PARRY MARK SHEPHERD, JR. Eli Lilly and Company Retired Chairman Retired Chairman ALCOA Texas Instruments Incorporated CHARLES J. ZWICK Retired Chairman WILLIAM R. PEARCE ROCCO C. SICILIANO Southeast Banking Corporation Director Chairman American Express Mutual Funds Dwight D. Eisenhower Memorial Commission JOHN H. PERKINS Retired President Continental Illinois National Bank and Trust Company

113 CED Research Advisory Board

Chair: DOUGLAS HOLTZEAKIN Economic Policy Chair JOHN L. PALMER John McCain 2008 University Professor and Dean Emeritus Th e Maxwell School HELEN LADD Syracuse University Professor of Economics Duke University

ROBERT E. LITAN Members: Vice President, Research & Policy Ewing Marion Kauff man Foundation ANTHONY CORRADO Charles A. Dana Professor of Government ZANNY MINTONBEDDOES Colby College Washington Economics Correspondent Th e Economist ALAIN C. ENTHOVEN Marriner S. Eccles Professor of Public & Private Management, WILLIAM D. NORDHAUS Emeritus Sterling Professor of Economics Stanford University Cowles Foundation Yale University BENJAMIN M. FRIEDMAN William Joseph Maier Professor of Political Economy RUDOLPH PENNER Harvard University Arjay and Frances Miller Chair in Public Policy Th e Urban Institute ROBERT HAHN Executive Director HAL VARIAN AEI-Brookings Joint Center Professor at Haas School of Business University of California Berkeley

114 CED Staff

CHARLES E.M. KOLB President

Research Development

JOSEPH J. MINARIK MARTHA E. HOULE Senior Vice President and Director of Research Vice President for Development and Secretary of the Board of Trustees

JANET HANSEN Vice President and Director of Education Studies RICHARD M. RODERO Director of Development

ELLIOT SCHWARTZ Vice President and Director of Economic Studies JENNA IBERG Development Associate

VAN DOORN OOMS Senior Fellow Finance and Administration LAURIE LEE MATTHEW SCHURIN Chief Financial Offi cer and Vice President of Finance and Research Associate Administration

CHARLES JOHNSON ANDRINE COLEMAN Research Associate Accounting Manager

JULIE KALISHMAN JERI MCLAUGHLIN Research Associate Executive Assistant to the President

Communications/Government Relations AMANDA TURNER Director of Administration MICHAEL J. PETRO Vice President and Director of Business and Government Relations and Chief of Staff JANVIER RICHARDS Accounting Associate

MORGAN BROMAN Director of Communications

AMY MORSE Communications and Outreach Associate

ROBIN SAMERS Director of Trustee Relations

JEANNETTE FOURNIER Director of Foundation Relations

LAURA OLDANIE Program Manager

115

Statements On National Policy Issued By The Committee For Economic Development

Selected Recent Publications: Reducing Risks from Golbal Imbalances (2007) How Economies Grow: Th e CED Perspective on Raising Built to Last: Focusing Corporations on Long-Term Perfor- the Long-Term Standard of Living (2003) mance (2007) Learning for the Future: Changing the Culture of Math Th e Employer-based Health-Insurance System (EBI) Is At and Science Education to Ensure a Competitive Work- Risk: What We Must Do About It (2007) force (2003) Th e Economic Promise of Investing in High-Quality Pre- Exploding Defi cits, Declining Growth: Th e Federal Budget school: Using Early Education to Improve Economic and the Aging of America (2003) Growth and the Fiscal Sustainability of States and the Justice for Hire: Improving Judicial Selection (2002) Nation (2006) A Shared Future: Reducing Global Poverty (2002) Open Standards, Open Source, and Open Innovation: A New Vision for Health Care: A Leadership Role for Harnessing the Benefi ts of Openness (2006) Business (2002) Private Enterprise, Public Trust: Th e State of Corporate Preschool For All: Investing In a Productive and Just Soci- America After Sarbanes-Oxley (2006) ety (2002) Th e Economic Benefi ts of High-Quality Early Childhood From Protest to Progress: Addressing Labor and Environ- Programs: What Makes the Diff erence? (2006) mental Conditions Th rough Freer Trade (2001) Education for Global Leadership: Th e Importance of Inter- Th e Digital Economy: Promoting Competition, Innovation, national Studies and Foreign Language Education for and Opportunity (2001) U.S. Economic and National Security (2006) Reforming Immigration: Helping Meet America’s Need for A New Tax Framework: A Blueprint for Averting a Fiscal a Skilled Workforce (2001) Crisis (2005) Measuring What Matters: Using Assessment and Account- Cracks in the Education Pipeline: A Business Leader’s ability to Improve Student Learning (2001) Guide to Higher Education Reform (2005) Improving Global Financial Stability (2000) Th e Emerging Budget Crisis: Urgent Fiscal Choices (2005) Th e Case for Permanent Normal Trade Relations with Making Trade Work: Straight Talk on Jobs, Trade, and China (2000) Adjustments (2005) Welfare Reform and Beyond: Making Work Work (2000) Building on Reform: A Business Proposal to Strengthen Breaking the Litigation Habit: Economic Incentives for Election Finance (2005) Legal Reform (2000) Developmental Education: Th e Value of High Quality Pre- New Opportunities for Older Workers (1999) school Investments as Economic Tools (2004) Investing in the People’s Business: A Business Proposal for A New Framework for Assessing the Benefi ts of Early Edu- Campaign Finance Reform (1999) cation (2004) Th e Employer’s Role in Linking School and Work (1998) Promoting Innovation and Economic Growth: Th e Special Problem of Digital Intellectual Property (2004) Employer Roles in Linking School and Work: Lessons from Four Urban Communities (1998) Investing in Learning: School Funding Policies to Foster High Performance (2004) America’s Basic Research: Prosperity Th rough Discovery (1998) Promoting U.S. Economic Growth and Security Th rough Expanding World Trade: A Call for Bold American Modernizing Government Regulation: Th e Need For Ac- Leadership (2003) tion (1998) Reducing Global Poverty: Engaging the Global Enterprise U.S. Economic Policy Toward Th e Asia-Pacifi c Region (2003) (1997) Reducing Global Poverty: Th e Role of Women in Develop- Connecting Inner-City Youth To Th e World of Work ment (2003) (1997)

117

CED Counterpart Organizations Close relations exist between the Committee for Economic Development and independent, nonpolitical research organizations in other countries. Such counterpart groups are composed of business executives and scholars and have objectives similar to those of CED, which they pursue by similarly objective methods. CED cooperates with these organizations on research and study projects of common interest to the various countries concerned. Th is program has resulted in a number of joint policy statements involving such international matters as energy, assis- tance to developing countries, and the reduction of nontariff barriers to trade.

CE Circulo de Empresarios Madrid, Spain

CEAL Consejo Empresario de America Latina Buenos Aires, Argentina

CEDA Committee for Economic Development of Australia Sydney, Australia

CIRD China Institute for Reform and Development Hainan, People’s Republic of China

EVA Centre for Finnish Business and Policy Studies Helsinki, Finland

FAE Forum de Administradores de Empresas Lisbon, Portugal

IDEP Institut de l’Entreprise Paris, France

IW Institut der deutschen Wirtschaft Koeln Cologne, Germany

Keizai Doyukai Tokyo, Japan

SMO Stichting Maatschappij en Onderneming Th e Netherlands

SNS Studieförbundet Naringsliv och Samhälle Stockholm, Sweden

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Committee for Economic Development Comm 2000 L Street N.W., Suite 700 A StatementStatement bbyy tthehe Washington, D.C. 20036 RResearchesearch aandnd PPolicyolicy 202-296-5860 Main Number 202-223-0776 Fax CCommitteeommittee ooff tthehe 1-800-676-7353 CCommitteeommittee fforor EEconomicconomic DDevelopmentevelopment www.ced.org