Mayhem in the Medical Marketplace
by David U. Himmelstein and Steffie Woolhandler
Monthly Review, 12/20/04

Even in the United States, some aspects of life are too precious, intimate or corruptible to entrust to the market. We prohibit selling kidneys and buying wives, judges, and children.

How far should such prohibitions extend? In recent years entrepreneurs and their friends in government have privatized many publicly-funded services previously provided by government or nonprofit agencies including interrogating Iraqi prisoners. Even in liberal Cambridge, our school superintendent proposes enlisting a for-profit firm to set up a new public high school.

Health care epitomizes this trend. Tax dollars account for 60 percent of U.S. health spending (counting as government spending not just Medicare, Medicaid, and Veterans Administration hospitals, but also the costs of health benefits for public workers and the tax subsidies for private coverage). (Indeed, on a per capita basis, public funding for health care in the United States exceeds total health spending in nations with national health insurance.) Yet investor-owned firms have come to dominate kidney dialysis, nursing homes, psychiatric hospitals, rehabilitation facilities, and HMOs. They have made significant inroads among acute care hospitals (they own about 13 percent of such facilities), as well as outpatient surgical centers, home care agencies, and even hospices.

Market theorists argue that the profit motive optimizes care and minimizes costs. But a growing body of evidence indicates that this dogma has no clothes.

The latest studies published in the Canadian Medical Association Journal and the Journal of the American Medical Association come from a highly respected group of Canadian researchers. They painstakingly culled every study ever published that compares the costs and outcomes of care at for-profit and nonprofit hospitals and dialysis clinics. To avoid bias in selecting studies, a librarian blacked out all indication of whether the study showed an advantage for nonprofit or for-profit. The researchers then used sophisticated statistical methods to combine all of the data (which all came from studies of U.S. facilities).

Their meticulous analyses demonstrate markedly higher costs and death rates in investor-owned hospitals than in nonprofit ones, and poor outcomes in investor-owned kidney dialysis clinics. The excess cost of for-profit care is substantial 19 percent implying that the $37.348 billion Americans paid for care at investor- owned acute care hospitals in 2001 would have cost only $31.385 billion at nonprofits; the waste amounted to $5.963 billion.

The waste in lives is more shocking; 2047 unnecessary deaths annually caused by for-profit ownership of hospitals, and 2500 killed each year by for-profit ownership of kidney dialysis centers.

It is easy to see why the profit motive might lead to skimpier care and lower quality. But why does investor ownership increase costs?

Investor-owned hospitals are profit maximizers, not cost minimizers. Strategies that bolster profitability often worsen efficiency and drive up costs. Columbia/HCA the largest hospital firm used several tricks to inflate its Medicare billings: exaggerating the severity of diagnoses; falsifying expense ledgers that form the basis of Medicare payment; and bouncing patients from its acute care hospitals to its convalescent hospitals and home care agencies, allowing it to bill multiple times for a single episode of illness. After paying fines and settlements totaling $1.7 billion, the firm continued merrily and profitably on its way. Tenet, the second largest hospital firm paid nearly $700 million to settle charges that it gave kickbacks for referrals and inappropriately detained psychiatric patients in order to fill beds during the 1980s, when the firm was known as NME. Tenet is back in the news for another round of alleged misdeeds, including performing hundreds of unnecessary, but lucrative cardiac procedures.

For-profit executives reap princely rewards, draining money from care. When Columbia/HCAs CEO resigned in the face of fraud investigations he left with a $10 million severance package and $324 million in company stock. Tenets CEO exercised stock options worth $111 million shortly before being forced out in 2003. The head of HealthSouth (the dominant provider of rehabilitation care) made $112 million in 2002, the year before his indictment for fraud.

Enormous CEO incomes explain part, but not all of the high administrative costs at investor-owned health care firms. Investor-owned hospitals spend much less on nursing care than nonprofit hospitals, but their administrative costs are six percentage points higher—reflecting their more meticulous attention to financial details.

High administrative costs and lower quality have also characterized for-profit HMOs. Now the dominant private insurers in the United States, such HMOs take 19 percent for overhead, versus 13 percent in nonprofit plans, 3 percent in the U.S. Medicare program, and 1 percent in the Canadian national health insurance program. Not surprisingly, contracting with private HMOs has inflated Medicare costs. According to the Congressional Budget Office, Medicare HMOs have selectively recruited healthy seniors who, had they stayed in traditional Medicare, would have cost Medicare little about $2 billion less annually than Medicare paid the HMOs in premiums. Private plans that were unable to recruit the healthy dropped out of their Medicare contracts, disrupting care for millions of seniors. The Republicans response was to sweeten the pot for HMOs by including $46 billion to raise HMO payments as part of the recently-enacted Medicare prescription drug bill.

Why do for-profit firms that offer inferior products at inflated prices survive in the market? Several prerequisites for the competitive free market described in textbooks are absent in health care.

First, it is absurd to think that vulnerable users of public services such as frail elders and the seriously ill who consume most care can act as informed consumers. They are usually unable to. They cannot comparison-shop, reduce demand when suppliers raise prices, or accurately appraise quality. Even lucid, educated patients may have difficulty gauging whether a hospitals luxurious appurtenances bespeak good care.

Second, the products of complex services like health care are notoriously difficult to evaluate, even for sophisticated buyers. Doctors and hospitals create the data used to monitor them; when used as the basis for financial reward such data has the accuracy of a tax return. By labeling minor chest discomfort angina rather than chest pain a U.S. hospital can raise its Medicare payment rate by 9.2 percent and factitiously improve its angina outcomes. Exploiting such loopholes has proven more profitable than improving efficiency or quality.

Even for honest firms, careful selection of lucrative patients and services is the key to success, while meeting community needs often threatens profitability. For example, for-profit specialty hospitals offering only cardiac or orthopedic care (money makers under current payment schemes) have blossomed across the United States. Most of these new hospitals duplicate services available at nearby nonprofit general hospitals, but the newcomers avoid money losing programs such as geriatric care and emergency departments (a common entry point for uninsured patients). The profits accrue to the investors, the losses to the nonprofit hospitals, and the total costs to society rise through the unnecessary duplication of expensive facilities.

Finally, a real market would require multiple independent buyers and sellers, with free entry into the marketplace. Yet, many hospitals exercise virtual monopolies. A towns only hospital cannot compete with itself, but can use its market power to inflate its earnings. Not surprisingly, for-profit hospital firms in the United States have concentrated their purchases in areas where they can gain a large share of the local market. Moreover, many health care providers and suppliers enjoy state-conferred monopolies in the form of licensure laws for physicians and hospitals, and patent protection for drugs (the pharmaceutical industry provides a virtual encyclopedia of market failure in U.S. health care, but well leave that for another day). Moreover, its an odd market that relies largely on public funds.

Privatization results in a large net loss to society in terms of higher costs and lower quality, but some stand to gain. Privatization creates vast profit opportunities for powerful firms and investors. The Frist family, whose scion Bill leads Republicans in the U.S. Senate, amassed its vast fortune from Columbia/HCAs hospitals. Ross Perot made his money selling computing services to Medicare. And each bump in Medicare payments to HMOs has driven HMO stock prices skyward.

Privatization also redistributes income among health workers. Pay scales are relatively flat in government and nonprofit health institutions; pay differences between the CEO and a housekeeper are perhaps 20:1. In U.S. corporations, a ratio of 180:1 is average. In effect, privatization takes money from the pockets of low wage, mostly female and often minority health workers and gives it to investors and highly paid managers.

Behind false claims of efficiency lies a much uglier truth. Investor-owned health care embodies a new value system that eradicates any vestige of the community roots and samaritan traditions of hospitals, makes doctors and nurses into instruments of investors, and views patients as commodities.

The inroads of the market have stimulated a new surge of support for national health insurance (NHI). Recently, 13,000 doctors have signed an NHI proposal (which appeared in the Journal of the American Medical Association) that would ban for-profit insurers and hospitals, echoing the sentiment of the 62 percent of Americans who favor NHI (according to an October, 2003 Washington Post/ABC News poll).

But market fundamentalists continue to peddle privatization as a panacea for health care and Americas other problems. They assure us that Aetna and Columbia/HCA will solve our health care woes, just as Edison will save our failing public schools, Enron will cut electricity rates in California, and Halliburton and Blackwater will rescue us in Iraq.

By Steve Lohr
Published: December 6, 2004
The New York Times

N Washington, the phrase “universal coverage” is rarely mentioned as the way to provide health insurance for the 45 million uninsured Americans. It evokes memories of the Clinton administration’s sobering failure to forge a national health care plan. Yet among health care experts there is a surprising consensus that the United States must inevitably adopt some kind of universal coverage.

“Politically, it’s like the electrified third rail on the subway – no one wants to touch it,” said Margaret O’Kane, president of the National Committee on Quality Assurance, an independent group that seeks to improve the quality of health care.

But health care experts contend that the issue must be addressed. Their policy proposals vary widely, and the proponents of universal coverage are as different as Dr. William W. McGuire, chief executive of one of the nation’s largest health insurers, and Dr. David Himmelstein of the Harvard Medical School, who recommends eliminating big insurers like Dr. McGuire’s company, the UnitedHealth Group.

Whatever their differences, they do agree that moving toward universal coverage would surely save lives and maybe dollars as well. A report this year by the Institute of Medicine of the National Academy of Sciences found that the uninsured are sick more often than the insured and likely to die younger, resulting in an estimated 18,000 additional deaths a year.

The uninsured receive medical care, but often when it is most expensive – acute care at hospitals after emergencies instead of regular checkups and other preventive care. And the uninsured pay only 35 percent of their own medical bills, according to the Institute of Medicine report. Most of the rest is paid by taxpayers through subsidies to hospitals and clinics.

Any plan for universal coverage must answer at least three basic questions: Will the move to national coverage follow an incremental, step-by-step path or require drastic change? What role will the government play? What should be covered under a universal system?

Dr. Himmelstein, an associate professor at the Harvard Medical School, advocates a fairly sweeping overhaul of health care in America by moving to a single-payer system run by the government. The nation, he said, can no longer afford the costs of bureaucracy in the American system.

Dr. Himmelstein was a co-author of a study last year, published in The New England Journal of Medicine, that found that administrative costs represented 31 percent of total health care spending in the United States, about double the proportion in Canada, which has a single-payer system.

The culprits, in Dr. Himmelstein’s view, are all the middlemen – chiefly insurers – tussling with doctors, hospitals and nursing homes over bills and reimbursements. “Health care has become a spectator sport with this huge, costly bureaucracy watching over us,” he said.

About one million of the workers in the system, Dr. Himmelstein said, are doing unneeded administrative work that could be eliminated. The savings from moving to a single-payer system, he estimated, would be roughly $375 billion a year. “That allows you to cover everyone,” he said.

The single payer, Dr. Himmelstein suggested, would be a pumped-up Medicare with greater buying power to bargain hard with suppliers like pharmaceutical makers, to control drug costs.

Not surprisingly, Dr. McGuire of UnitedHealth opposes the single-payer formula. “The key issue is not who is paying, but what you are paying for,” he said. “I think we should have mandatory insurance. It should be based on the concept of an essential benefit. Guided by medical science, we should decide what is essential and provide it.”

The essential package, Dr. McGuire said, should cover hospital care. It should also promote healthy lifestyles and cover preventive care so that people with high blood pressure or high cholesterol, for example, would be less likely to develop heart disease, which is not only debilitating for the patient but also costly to treat.

Preventive care need not be expensive, Dr. McGuire said. For example, there are low-cost generic drugs that are equally effective in most cases – statins for lowering cholesterol and beta blockers for high blood pressure – that cost pennies per pill instead of the dollars charged for brand-name drugs still covered by patents.

If a person is employed, his or her employer would have to pay for the essential benefit, according to Dr. Maguire. Self-employed people, or others who are financially able, would pay for their own insurance, and for everyone else, the obligation would fall to the federal government or the states.

By
Jonathan Tasini
December 03, 2004

George Bush is beginning to frame his Social Security reform agenda as a way to help workers. That leaves Democrats the opportunity to reframe the debate about the best way to do so. Jonathan Tasini argues what will help workers-and American employers-is a single-payer health plan. But if Dems get stuck in a classic denial defense on Social Security, they may lose big.

So, the Bush administration wants to help workers, make business more competitive and ensure a nice, comfortable retirement. If that is true, why is the conversation about privatizing Social Security, instead of about single-payer health care? Why are we debating a crisis that doesn’t exist (the “insolvency” of Social Security) instead of a crisis that clearly exists: the scandalous nature of our health care system?

It’s easy to show that turning Social Security over to the stock market speculators is a dumb, ideologically driven idea whose true costs are being hidden (surprise!) by the administration (see the Center for Economic and Policy Research http://www.cepr.net/publications/facts_social_security.pdf What’s more fun is to argue, plausibly, that we can do a lot more for business, workers and retirees by enacting a national health plan.

Here’s how the math works. This country will spend $1.8 trillion on health care in 2004, one-seventh of the entire gross domestic product-tops in the world; some estimates see that figure hitting 2.75 trillion by 2010. I know most people like to think that we live in a private insurance world, but actually 60 percent of health insurance money is already a public expense,paid by tax payers in the form of Medicare and Medicaid.

But 20 percent of that mammoth number is paid by business, so that’s a nice round $360 billion. According to Physicians http://www.tompaine.com/articles/www.pnhp.org for a National Health program, a single-payer system could be financed by a 7 percent payroll tax and a 2 percent income tax (with the income tax part potentially progressive). With one bold stroke, a single-payer system would do more to help the bottom line of companies than any tax break or so-called “free trade” agreement.

An Obvious Win-Win

Take General Motors. It spends 15 percent of its revenue on health care costs: 4.8 billion in 2003 and roughly $5.1 billion in 2004. Its future obligations for employee and retiree health care is more than $60 billion. Want to translate that into competitiveness? A GM car costs $1,400 more just because of its health care costs. If you figure, very roughly, that, right now, health care costs are rising 7 percent a year, under a single-payer system, GM would cut its health care costs in half. Hello?

As for the much-praised small business community, it would benefit even more from single-payer health care. Small businesses often pay 20 to 25 percent of revenues to pay for health care plans-and, then, are often forced to drop the coverage because they claim it’s too expensive.

And how about single-payer being an instant effective pay raise for millions of Americans? Every union negotiating a collective bargaining agreement could potentially win well-deserved pay hikes for workers whose wages have been falling behind inflation
http://www.epinet.org/content.cfm/webfeatures_snapshots_10292004; right now, every union’s main battle is fighting just to keep health care coverage in place. And individuals who are not lucky enough to have employer-based health care and who have been shelling out thousands of dollars in premiums for a bare-bones health plan (which encourages people never to get sick),would pocket a sizable chunk of change with a single-payer plan. Finally, by saving money for them on prescription drugs, among other benefits, single-payer would also be a guaranteed help to retirees-not the riverboat gamble a privatized Social Security system would be. Oh, I forgot: seniors won’t need that money because they will be kicking back and drinking cocktails thanks to their “private investment accounts” just bulging from huge profits they will have made from their stock-market picks.

Now, it’s pretty obvious why the administration is making certain choices. The pharmaceutical industry has been the single most profitable industry in the past decade. And the financial services industry can barely restrain its orgasmic delight at the thought of the hundreds of billions of dollars that will wash into the market if Social Security is turned over to the Street. Both industries, along with the health care companies, have showered tens of millions of dollars in political campaign contributions on the Republicans (and, to be fair, have written quite a few checks to Democrats, too).

Ways Forward

So, though the positive aspects of single-payer are nothing new, two things strike me as worth pointing out today. First, this is a ripe area for a new, concerted effort at shareholder activism. The argument is simple: companies who don’t advocate for a single-payer system are endangering share-holder value, throwing money into a system that is dragging down profits and competitiveness. And, in particular, it’s the huge public employee pension funds, representing hundreds of thousands of current and retired workers, who have a significant financial interest in seeing the system changed; the California Public Employees Retirement System alone has $177 billion.

Second, progressives are falling into a familiar trap. We’re arguing on the wrong turf. As long as we keep arguing about the Social Security “crisis,” we’re losing. The Republicans, their allies and too many Democrats have framed the debate as “fixing” Social Security. When we argue that Social Security “isn’t broken,” we are playing inside their debate terms-and losing.

We have to shift the debate. We need to say that the real issue for Americans is that we want a society where everyone is in good health, a society where every person can have the opportunity to succeed and that that opportunity comes with the financial security and peace of mind that only a single-payer system can deliver. Wouldn’t it be better, we need to ask, if, instead of choosing the drug and insurances companies, we would stand for our families, for health security, for the wisest investment the government can make towards our collective well-being? And, finally, wouldn’t it be better to stand for the stability and competitiveness of American business, from big companies all the way to the small businesses everywhere who would like to have healthy, productive workers?

Jonathan Tasini
President
Economic Future Group
Jonathan Tasini is president of the Economic Future Group and writes his “Working In America” columns for TomPaine.com on an occasional basis.