Presented at the Hudson Institute panel, Health Insights Forum, Naples FL, May 1, 2003

This paper based on a talk on a panel asked to address the topic: “The Health System Is Broken.” The panel provided payer, employer and provider perspectives on the extent and nature of the problems.

Society wants to have more comprehensive coverage of medical care. But sharing the cost through insurance encourages everyone to seek more and better medical care and reduces the willingness to accept measures that limit availability. And society wants a strong measure of individual responsibility and freedom of choice. So it should not be surprising that numerous efforts have been unsuccessful in containing the rise in medical costs for any length of time. While health-care payers take heavy criticism for the state of the health system, they face the full range of complexities and absurdities that the broken health system presents to all. In the words of cartoon character Pogo Possum: “We have seen the enemy and he is us.”

Issues Common to All Payers

While private payers have a different mix of concerns than Medicare, Medicaid, the U.S. Treasury and state and local governments, there are some issues that are common to all payers. Most notable among these are rising costs and inefficiencies in health-care delivery.

Population growth adds to spending while aging adds to costs because the elderly spend far more per capita than the rest of the population. The share of older persons in the population is increasing because of increases in life expectancy and will grow dramatically with the aging of the baby boomers.

Medical miracles abound. Yet costs of health care are rising rapidly especially because of  the advances in medical technology that continue to bring life-saving and life-enhancing treatments. We do not have adequate systems for deciding when new technologies are ready for use or for displacing technologies when more effective or lower cost alternatives are available. In the case of drugs, technology has been creating more expensive products, some significantly more effective but others only marginally so. And drugs are marketed in ways that do not always produce the most desirable patterns of use.

Malpractice considerations take a high toll, raising the cost of insurance and leading to huge costs of defensive medicine. Moreover, they discourage innovative treatments and entrance of competing medical personnel.

Inefficiencies in health care are evident in high costs and prices relative to other countries, most notably in physician incomes, drug prices and administrative costs. There is wide geographic variation in utilization within the U.S., overuse of emergency rooms, payments to providers that do not adequately reflect efficiency or quality, and quality of care issues as evidenced in reports of medical errors. Inefficiencies are perpetuated by difficulties in sharing medical records, gaining cooperation among departments and institutions, and removing licenses and closing facilities. Overbearing regulation makes it exceedingly difficult for competition to force fundamental change.

Private Payer Perspectives

Private payers face many restrictions that prevent cost containment or raise costs. This is evident in federal and state managed care legislation and in court rulings on issues such as required care and applicability of lawsuits to managed care companies. Provider resistance to efforts to rationalize care through incentives has increased with hospital mergers and acquisitions of physician groups.

Consumer preferences for choice also limit the ability to contain costs. Rapid growth has occurred in plans that offer greater choice of provider, particularly PPOs, and plans have been abandoning or reducing use of gatekeepers. Both consumers and employers demand large provider panels, making it more difficult to control costs and quality.

Private payers face resistance from employers in passing on costs in higher premiums.  Employers have been cutting back in coverage for retiree health benefits and smaller employers have been reducing coverage.

A high and rising number of uninsured raises the costs of private insurance as payment for uncompensated care is spread among those who pay. With large immigrant populations among the uninsured, not all who could be covered by programs like Medicaid apply and many show up in emergency rooms for uncompensated non-emergency care. A large uninsured population complicates offering coverage at reasonable rates and expanding coverage to individuals.

Significant numbers of uninsured could afford to pay all or part of insurance on their own and are failing to contribute, while reaping the benefits of a system that will treat them when problems arise. In part this results from society's decision not to allow age-adjustment of premiums so younger people will contribute to the care of all.

Private payers also face a Kafka-esque system of Medicare reimbursement and restrictions on the terms of Medicare managed care programs they can offer, limiting or prohibiting physician incentive payments, cost sharing differentials between plans and out-of-network benefit differentials. Insurers are asked to administer a Medicaid system that pays providers too little to attract sufficient numbers of personnel and high quality personnel into low-income neighborhoods and is riddled with bureaucracy.

Medicare

Medicare faces heavy demands for services as a result of the growth of chronic illness which has accompanied declining mortality, and which persists despite “active aging”. It also has to deal with a rise in age within the Medicare population as longevity is extended. And there is rapid growth in the number of people eligible for Medicare through the Social Security disability program.

At the same time, benefits are insufficient. The lack of outpatient drug coverage limits the ability to take care of unmet needs, reduces continuity of care and makes it hard to avoid utilization of high cost services. While lack of Medicare outpatient drug coverage is ameliorated by employer-paid retiree health coverage and drug coverage in Medicare supplement insurance plans, both forms of assistance are being reduced rapidly. The lack of coverage of long-term institutional care and limitations on long-term provision of home care are great impediments to creating innovative arrangements that can integrate medical and non-medical services to more completely meet the needs of the elderly.

Despite the gaps in coverage, Medicare is grossly underfunded. Underfunding of the hospital trust fund is as great as underfunding in the Social Security retirement program. Moreover, ambulatory care and other services under Part B only appear to be adequately funded because of the assumption that they will get huge and increasing subsidies from the federal treasury. Congress has been unwilling to increase the insured's share of Part B. It even moved some services from Part A to Part B to make the program appear more fully funded.

Both government and private payers struggle with difficulties of setting appropriate reimbursement for Medicare services. There is great uncertainty over appropriate payments for Medicare managed care relative to payments for fee-for-service under the traditional Medicare program as populations in each group change. Adjustments of provider payments for case severity and complexity have proved to be too inaccurate to avoid significant inequities. Applying per case reimbursement across inpatient and outpatient settings has been a challenge. And there is continuing difficulty in efforts to create reimbursement categories that enable legitimate care arrangements to grow without allowing excesses from overuse of a new category (sub-acute care comes to mind).

Medicaid and Other Programs for People with Low Incomes

Low income and special-needs populations face highly fragmented reimbursement that greatly complicates the provision of services. Medicaid leaves many indigent people uncovered because it largely applies only to persons on welfare. As a result, many people go off and on coverage as their circumstances change or have to become impoverished by medical bills before they can become eligible. Enrollment of children is notoriously incomplete. Many undocumented aliens are reluctant to apply. Rapid growth in Medicaid as a supplement to Medicare for low income elderly and in specialized programs such as budget carve outs for people with AIDS add to the numbers subject to fragmented rules.

Difficulties in assuring appropriate services are complicated by insufficient numbers of community-based providers. Efforts to provide more comprehensive care as well as control costs have centered on the development of mandatory Medicaid managed care. However, growth has stalled at around 60 percent of enrollees nationally and desired levels of continuity of care often have not been achieved.

State and local governments face severe difficulties in paying for the rising costs of Medicaid because of overall budget deficits that are expected to reach $90 billion in 2003 alone. The pressures of reducing these deficits is leading to cutbacks at a time people are in greater need of assistance. The fiscal situation will not heal quickly.

In the fast approaching long run, the most serious problem is that Medicaid and social services face a complete lack of any trust funds to cover an aging population. Huge financial burdens from these programs will come at the same time as the nation has to deal with the surging costs of retirement and Medicare. Lack of funding for Medicaid will be a pressing problem for state and local governments who will have to deal with most of the cost increases for long-term care.

U.S. Treasury

The federal budget shift to deficit will likely persist, albeit not at recession levels, making it difficult to provide extensive additional funding for health. Yet much additional funding already is required and pressures are building for more.

The U.S. Treasury subsidizes the purchase of health insurance through tax deductibility of premiums. In addition, the cost of medical care is reduced for those with the greatest expenses through the deduction for medical expenses above 7-1/2% of income. General government revenues are required to cover the huge and rapidly growing subsidies for Medicare Part B. The Treasury will have to deal with the high costs and possible underfunding of proposed programs for expanding Medicare drug coverage and dealing with the uninsured. It will have to deal with the underfunding of Medicare and the lack of trust funds for Medicaid. The nation is totally unprepared for these costs and their consequences.

State and Local Concerns

State and local governments must contend with severe financial difficulties, rapidly rising medical costs and rising numbers of uninsured. They face a flood of federal programs and requirements that complicate enrollment, administration and reimbursement. Tobacco settlements are impermanent and uncertain. In spite of rising demands and disastrous finances, they may have to contend with proposed caps on the growth of federal Medicaid contributions.

In Summary

From the payers’ point of view, critical points include:

·         The way we pay for health care reflects what society wants, not in terms of the amount of health care or its cost, but in the ways it balances decisions about insurance, individual responsibility and freedom of choice.

·         We do not have adequate systems for deciding when new technologies are ready for use or for displacing technologies when more effective or lower cost alternatives are available.

·         The ability of private payers to contain costs increasingly is limited by legislation and consumer preferences.

·         A large uninsured population complicates offering coverage at reasonable rates and expanding coverage to individuals.

·         Medicare faces dual problems of lack of drug and long-term care coverage and vast underfunding of future liabilities. Incomplete coverage limits the ability to develop integrated services.

·         Lack of funding for future Medicaid and social service costs creates enormous problems for the programs and the states.

Directions for Solution

The nation faces many grand challenges in fixing the health system:

_      Paying for advances in technology

_      Paying for an aging population

_      Agreeing on approaches for more universal coverage

_      Technology decision-making

_      The future of employer-based health insurance

_      Using choice to better meet individual needs and contain costs

                      

There are many possible approaches to improving the system. Potential solutions entail many complexities and sometimes contradict on another (see Appendix). They include:

·         Putting more money into the system.

·         Increasing coverage.

·         Improving efficiency and quality.

·         Developing and using cost-reducing technologies.

·         Prevention and early diagnosis and treatment.

·         Lifestyle improvements.

·         Reducing emphasis on specialized personnel and facilities.

·         Restricting services.

·         Limiting payments.

Progress will require sustained cooperative efforts to address issues across all aspects of eligibility, funding, reimbursement, service delivery, education, research and technology.

There is a clear need for bolder action. Yet there are many competing considerations and a need for care not to create greater problems. With so much to be done, consensus cannot be achieved all at once, and improvements will have to come in several waves over many years. The alternative is a system that continues to become ever more dysfunctional, both in its operation and in the ability to right itself. By the time a crisis of unfunded elderly baby boomer health costs arrives, that will lead to a level of rationing that no one wants.

Solutions involve very different views of the nature of the problems and the roles and effectiveness of individuals, institutions, providers and governments. These will not be reconciled easily. Problems will continue to mount until opinion finally favors doing something and giving one of the competing approaches a chance.

Appendix

Examples of Policy Approaches
Approach	Some Policies
Putting more money into the system	Medicare drug benefit Expansion of Medicaid Pools for the uninsured Higher provider fees under Medicare and Medicaid Mandatory coverage
Increasing coverage	Expansion of Medicaid Pools for the uninsured Mandatory coverage
Improving efficiency and quality	Practice guidelines Concentrating some procedures in high volume facilities Centers of excellence Other evidence-based medicine initiatives Report cards Use of the Internet Consumer choice plans Reforming Medicare+Choice Systems for accepting new technologies Closing inadequate facilities and practices
Irving Leveson is an Adjunct Fellow for Hudson Institute. Email Irving Leveson Share     Home | Learn About Hudson | Hudson Scholars | Find an Expert | Support Hudson | Contact Information | Site Map Policy Centers | Research Areas | Publications & Op-Eds | Hudson Bookstore Hudson Institute, Inc. 1015 15th Street, N.W. 6th Floor Washington, DC 20005 Phone: 202.974.2400 Fax: 202.974.2410 Email the Webmaster © Copyright 2013 Hudson Institute, Inc.