Wanting It All: The Challenge of Reforming the U.S. Health Care System Wanting It All: The Challenge of Reforming the U.S. Health Care System ©2007 Federal Reserve Bank of Boston. All rights reserved. edited by No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher. Jane Sneddon Little This edited volume is based on a conference held in June 2005 by the Federal Reserve Bank of Boston. Conference Series No. 50 Cover illustrations by Art Glazer. This book was set in Sabon by Sztrecska Publishing and was printed and bound in the United States of America. Federal Reserve Bank of Boston Boston, Massachusetts vi Contents Comments on Enthoven’s “The U.S. Experience 119 Contents with Managed Care and Managed Competition” Michael E. Chernew Comments on Enthoven’s “The U.S. Experience 127 with Managed Care and Managed Competition” Sherry A. M. Glied 5 How the U.S. Health Care System Affects U.S. Labor 135 Markets The U.S. Health Care System and Labor Markets 137 Brigitte C. Madrian Acknowledgments ix Comments on Madrian’s “The U.S. Health Care System 165 1 Introduction 1 and Labor Markets” Reforming the U.S. Health Care System: Where There’s 3 Henry S. Farber a Will, There Could be a Way Employer-Funded Health Care and Labor Markets: 173 Jane Sneddon Little and Teresa Foy Romano An Insider’s View 2 Understanding the Political Challenge 27 Robert S. Galvin, M.D. 29 The Politics of U.S. Health System Reform 6 The U.S. Health Care System and U.S. Fiscal Stability 181 Theodore R. Marmor It’s Health Care, Stupid! Why Control of Health Care 183 3 Defining the Health Care Challenge 45 Spending Is Vital for Long-Term Fiscal Stability What Is Good Care, and What Is Bad? 47 Henry J. Aaron David M. Cutler It’s Technology (and What It Is or Isn’t Worth), Stupid! 207 The Health Care Challenge: Some Perspectives 61 Comments on Aaron’s “It’s Health Care, Stupid! from Behavioral Economics Why Control of Health Care Spending Is Vital for Richard G. Frank Long-Term Fiscal Stability” Costs, Benefits, and Rationing of Health Care: Comments 77 Mark V. Pauly on Cutler’s “What Is Good Care, and What Is Bad?” Comments on Aaron’s “It’s Health Care, Stupid! 213 William D. Nordhaus Why Control of Health Care Spending Is Vital Comments on Cutler’s “What Is Good Care, and 89 for Long-Term Fiscal Stability” What Is Bad?” C. Eugene Steuerle Kieke G. H. Okma Comments on Aaron’s “It’s Health Care, Stupid! 223 4 The U.S. Health Care System under Managed Care: 95 Why Control of Health Care Spending Is Vital A Case Study for Long-Term Fiscal Stability” The U.S. Experience with Managed Care and 97 Alan R. Weil Managed Competition Alain C. Enthoven Contents vii 7 Reform Options: Matching the Tools with the Goals 229 Will the United States Continue to Allocate a Growing 231 Proportion of Its GDP to Health Care? Stuart H. Altman Comments on Altman’s “Will the United States Continue to 245 Allocate a Growing Proportion of Its GDP to Health Care?” Judith Feder The Need for Managed Incentives: Comments on Altman’s 249 “Will the United States Continue to Allocate a Growing Proportion of Its GDP to Health Care?” David O. Meltzer, M.D. Comments on Altman’s “Will the United States Continue to 257 Allocate a Growing Proportion of Its GDP to Health Care?” Joseph P. Newhouse 8 Policy Debate: Reforming the U.S. Health Care System, 265 the Road Ahead Economic Perspectives on Health Information Technology 267 David J. Brailer, M.D. Reforming the U.S. Health Care System: Improving Coverage, 285 Quality, and Efficiency Karen Davis Health Financing: Challenges and Opportunities, 295 Coverage and Cost James J. Mongan, M.D. Contributing Authors 301 Author Index 313 Subject Index 319 Acknowledgments The Research Department of the Federal Reserve Bank of Boston and the editor thank all of the many people who contributed to the confer- ence and to this book. To single out a few, we thank Samuel O. Thier for his inspiration and support, as well as Patricia Geagan for superb management of the conference arrangements. She was ably assisted by David J. Brown, Tom DeCoff, Donna Dulski, Nancy Gillespie, Kristina Johnson, Fabienne Madsen, and Ralph Ragsdale. As the manag- ing editors, Suzanne Lorant and Elizabeth Murry worked creatively with the authors to shape the volume and shepherd the book from manuscript review to final copy; their contributions were key. Teresa Foy Romano assisted with the overall production process; Ann Eggleston, Art Glazer, Fabienne Madsen, Sally Sztrecska, Linda Walsh, and Tyler Williams also made valuable contributions to the preparation of this book. 1 Introduction 4 Introduction now 9 percent and growing—that is roughly akin to manufacturing’s Reforming the U.S. Health Care System: shrinking share of the workforce. In New England, health care looms Where There’s a Will, There Could Be a Way even larger, accounting for almost 12 percent of regional employment. In the future, this sector is almost certain to absorb an even greater share of GDP; for, as Organisation for Economic Co-operation and Develop- Jane Sneddon Little and Teresa Foy Romano ment (OECD) data suggest, as national incomes rise, countries generally choose to spend a growing share of their income on health and health care (Figure 1.1).1 With health care spending projected to reach 22 percent of GDP by 2025 (Council of Economic Advisers 2006), it becomes increasingly important that U.S. policymakers be able to measure accurately health Periodically, the tensions and contradictions emanating from the big, care output, prices, and productivity—no easy task. Currently, the most marvelously innovative, highly inequitable, and hugely expensive U.S. familiar measure of health care costs is probably the medical care con- health care system force a general reassessment of the way this country sumer price index (CPI), which measures inflation in consumers’ out-of- finances and delivers health care for its citizens. One of these periods pocket costs for medical care, a fraction of total health care spending. appears to be approaching—although, as Ted Marmor pointed out over For a variety of reasons, the medical CPI has been increasing a lot faster a decade ago, coalitions preferring the status quo almost always pre- than the core CPI, helping to boost broad measures of inflation and labor vent these reassessments from resulting in more than incremental change costs as well. In addition, rapid medical cost inflation has contributed to (Marmor 1994). Today, more than 46 million people are uninsured, fami- lies with health insurance fear that they may lose it, firms with household names seek ways to extricate themselves from providing health insurance 6,000 for their employees, and the new Deficit Reduction Act of 2005 permits USA 5,000 doctors and hospitals to deny services to Medicaid recipients who cannot meet required co-payments and deductibles. In an early 2006 article, the 4,000 CHE NOR Economist asserts that the “world’s biggest and most expensive health FRA LUX ISL NLD care system is beginning to fall apart”; it also suggests that health reform iture per capita 3,000 DEU d AUS CAN is “one of the most complicated challenges facing America’s economy” SWE DNK (USD PPP) ITA IRL (“Special report: America’s health-care crisis” 2006). Why has health 2,000 GRC NZL FIN PRT JPN AUT BEL care become a major challenge to the U.S. economy and to economic ESP GBR HUN CZE Health expen policymakers? At least three developments explain the growing impor- 1,000 POL KOR TRK SVK tance of health reform as an economic issue. MEX 0 Clearly, the health care sector is now very large and touches most 0 10,000 20,000 30,000 40,000 50,000 60,000 aspects of the U.S. and New England economies. In 2004, spending on GDP per capita medical care amounted to 16 percent of U.S. nominal gross domestic (USD PPP) product (GDP)—more than consumers spent on food, clothing, and Figure 1.1 energy in total and about equal to all business investment in plant and International Comparison of Per Capita Spending: Health Care versus GDP equipment. Furthermore, health care’s share of nonfarm employment is Source: OECD, 2002. Jane Sneddon Little and Teresa Foy Romano 5 6 Introduction a widespread impression that productivity in the U.S. health care sector shifts from full-time to part-time, and union to nonunion, status. In addi- may be rather low. By contrast, a growing body of recent research pro- tion, a smaller share of workers who are offered health insurance now vides evidence of significant productivity gains in health care for patients choose to take it—most likely because a growing fraction of employers suffering from specific widespread problems, such as cataracts, depres- are requiring workers who elect this benefit to contribute more toward sion, and heart attacks. But do these findings apply to the entire health its cost (Wiatrowski 2004). Another factor may be the increase in two- care sector? Indeed, international data indicate that the United States worker households. spends far more per person on health care than would be expected given Are these employment-based financing arrangements affecting the sup- its per capita income (Figure 1.1),2 while data on expenditures and out- ply or demand for labor in this country? Do they influence the structure comes suggest that this country’s extra spending may not be particularly of employment, encouraging a shift toward the use of temporary or con- productive (Figure 1.2).3 tract labor? Does our health care system distort our labor market and A second reason for economists’ concern about the health care system reduce its flexibility? Policymakers are concerned about the answers to reflects its possibly distorting effect on the operation of the U.S.