Economic Report of the President
and
The Annual Report of the Council of Economic Advisors
February 2004

Chapter 10
Health Care and Insurance

This chapter discusses the roles of innovation, insurance, and reform in the health care market. The key points in this chapter are: U.S. markets provide incentives to develop innovative health care products and services that benefit both Americans and the global community.

. Over reliance on health insurance as a payment mechanism leads to an inefficient use of resources in providing and utilizing health care.

. Reforms should provide consumers and health care providers with more flexibility and information.

http://www.gpoaccess.gov/eop/index.html

And…

The New York Times
February 17, 2004
The Health of Nations
By Paul Krugman

The Economic Report of the President, released last week, has drawn criticism on several fronts. Let me open a new one: the report’s discussion of health care, which shows a remarkable indifference to the concerns of ordinary Americans…

When I saw that the president’s economic report devoted a whole chapter to
health care, I assumed that it would make some attempt to address these public concerns.

Instead, the report pooh-poohs the problem. Although more than 40 million
people lack health insurance, this doesn’t matter too much because “the uninsured are a diverse and perpetually changing group.” This is good news? At any given time about one in seven Americans is uninsured, which is bad enough. Because the uninsured are a “perpetually changing group,” however, a much larger fraction of the population suffers periodic, terrifying spells of being uninsured, and an even larger fraction lives with the fear of losing insurance if anything goes wrong at work or at home.

The report also seems to have missed the point of health insurance. It argues that it would be a good thing if insurance companies had more information about the health prospects of clients so “policies could be tailored to different types and priced accordingly.”

Having brushed off the plight of those who, for economic or health reasons, cannot get insurance, the report turns to a criticism of health insurance in general, which it blames for excessive health care spending.

Is this really the crucial issue? It’s true that the U.S. spends far more on health care than any other country, but this wouldn’t be a bad thing if the spending got results. The real question is why, despite all that spending, many Americans aren’t assured of the health care they need, and American life expectancy is near the bottom for advanced countries.

Where is the money going? A lot of it goes to overhead. The result is that American health care, which at its best is the best in the world, offers much of the population a worst-of-all-worlds combination of insecurity and high costs. And that combination is getting worse:insurance premiums are rising, and companies are becoming increasingly unwilling to offer insurance to their employees.

What would an answer to the growing health care crisis look like? It would surely involve extending coverage to those now uninsured. To keep costs down, it would crack down both on drug prices and on administrative costs. And it might well cut private insurance companies out of the loop for some, if not all, coverage.

But the administration can’t offer such an answer, both because of its ideological blinders and because of its special interest ties. The Economic Report of the President has only negative things to say about efforts to hold down drug prices. It talks at length about insurance reform, but it mainly complains that we rely too much on insurance; it says nothing about either expanding coverage or reducing insurance-company overhead. Its main concrete policy suggestion is a plan for tax-deductible health savings accounts, which would be worth little or nothing to a vast majority of the uninsured.

http://www.nytimes.com/2004/02/17/opinion/17KRUG.html

Comment: Perhaps the easiest way to attack the dual problem of high health care costs with a grossly inadequate system of insurance is to condemn our over reliance on insurance. That takes care of the healthy and wealthy. But what do we do about those with health care needs?

Perhaps the easiest solution is really in the opposite direction – provide comprehensive coverage for everyone.

Two nearly identical transcripts of the debate panel, “Border wars,” featuring Milton Friedman, Gil Gutknecht, Sally Pipes and Don McCanne are now available on the Internet. One is available on the website of Pacific Research Institute, which hosted the event. The other is on the website of Tech Central Station, “Where Free Markets Meet Technology,” which is hosted by James K. Glassman who also served as moderator of this panel debate.

An excerpt from the transcript posted at Pacific Research Institute:

Glassman: This is the last question from the floor and I’m going to ask it
to Dr. McCanne first. Then I’d like to hear Congressman Gutknecht’s comments, and we’ll end with Dr. Friedman’s comments. The question is this: Top-down, command and control stifles innovation, writes someone sitting in front of me. I think that’s a pretty good proposition. How does Dr. McCanne expect innovation to occur?

McCanne: Well, just not top-down control, but funding. You know, price controls and budgeting and so forth. And that really is an important issue in innovation. But if we look at the history in technological innovation, probably two of the very greatest advances in the last half century have been MRI scans and CT scans. Each of those appropriately received the Nobel Prize for those developments. Where were they developed? Well, the Nobel Prize was shared with a British scientist. England has amongst the lowest rate of funding of their health care system, but that did not stop the technological innovation that occurred in the CT scanning and MRIs, and some of the other research that has taken place.

Glassman: Let me just refine this question a little bit and hear from the congressman, and then finally from Dr. Friedman. Innovation is something I spend a lot of my time thinking about. And it’s quite clear that our system, which is relatively free in these areas despite problems with the FDA, does promote innovation in drugs. I think that would be very hard to argue against. By disrupting that system in the way that you propose, many people think you would stifle that kind of innovation. Where is this innovation going to come from if it’s not from drug companies wanting to make decent profits on developing new drugs?

McCanne: There’s no way the drug industry is going to walk away from $1.6
trillion, period.

Gutknecht: Well, first of all I want to pierce this myth that they don’t do any research in Europe with the system that they have. If you look at the major pharmaceutical companies, Glaxo is a British company. Bayer is a German company…

The Pacific Research Institute transcript:
http://www.pacificresearch.org/press/rel/2004/ma04-01-27/transcript2.pdf

For the video:
http://www.pacificresearch.org/borderwarsdebate_video.html

For the audio:
http://www.pacificresearch.org/borderwarsdebate_audio.html

And an excerpt from the same portion of the transcript as it was posted at
Tech Central Station (This is essentially the same except for the absence of
my comment about the drug industry not walking away from $1.6 trillion):

Glassman: Let me just add, this is the last question from the floor, I’m
going to ask it to Dr. McCan first. I’d like to hear Congressman Gutknecht’s
comments, and then we’ll end with Dr. Friedman’s comments. The question
is this: Top-down, command and control stifles innovation writes someone
sitting in front of me. I think that’s a pretty good proposition. How
does Dr. McCan expect innovation to occur?

Dr. McCan: Well, just not top-down control, but funding. You know,
price controls and budgeting and so forth. And that really is an important
issue in innovation. But if we look at the history in technological
innovation, probably two of the very greatest advances in the last half century have been MRI scans and CT scans. Each of those appropriately received the Nobel Prize for those developments. Where were they developed? Well, the
Nobel Prize was shared with a British scientist. England has amongst the
lowest rate of funding of their health care system, but that did not stop the
technological innovation that occurred in the CT scanning and MRIs, and
some of the other research that has taken place.

Glassman: Let me just refine this question a little bit and hear from the
congressman, and then finally from Dr. Friedman. Innovation is kind of what
I spend a lot of my time thinking about. And it’s quite clear that our system, which is relatively free in these areas despite problems with the FDA, does promote innovation in drugs. I mean I think that would be very hard to argue against. Disrupting that system in the way that you propose, many people think would stifle that kind of innovation. Where is this innovation going to come from if it’s not from drug companies wanting to make decent profits on developing new drugs?

Rep Gutknecht: Well, first of all I want to pierce this myth that they
don’t do any research in Europe with the system that they have. If you look
at the major pharmaceutical companies, Glaxo is a British company. Bayer, as
you mentioned, we call it Bayer, is a German company…

The Tech Central Station transcript:
http://www.techcentralstation.com/020204D.html

Comment: James Glassman did not allow opening statements, and he controlled
all questions. (But he did allow himself an opening statement, and Sally
Pipes added her own written statement to the beginning of the PRI transcript.)

On the video you will see that Glassman did grant me permission to make the
very brief comment about the $1.6 trillion. We can speculate as to why he
left it out of his version of the transcript. But it does seem to be a powerful argument against his point that not enough funds would be available
to provide the profits that would encourage innovation in new products.

Regardless, this is a time for open and honest discussion of the serious
problems that plague our health care system. We need to lay ideology aside
and forthrightly address the real issues. Suppressing debate and striking
out responses not to one’s liking does not add to this process.

Los Angeles Times
February 15, 2004
Costco Sees Value in Higher Pay
By James Flanigan

Much of corporate America is driven today by the belief that to be competitive, companies must cut their employees’ wages and benefits.

Nowhere is this creed held more devoutly than among the supermarket chains that are enduring a strike and have locked out their workers in Southern and Central California. A new kind of labor agreement that cuts pay and sharply slashes employer contributions to health benefits is imperative, declares Steven Burd, chief executive of Safeway Inc., “if we’re going to stay in business.”

Jim Sinegal sees things much differently. The chief executive of Costco Wholesale Corp., a warehouse club retailer with 430 stores, likes to boast of his company’s relatively high pay and benefits for its 92,000 employees.

… Costco – where a full-time clerk or warehouse worker earns more than $41,000 annually after four years, compared with $37,232 at the upermarkets…

Unlike the supermarket workers, Costco employees have always paid a portion
of their health insurance. The co-payment is now 4.5%, or $500 to $1,000 a year. That will rise to 8% in the next four years, to keep up with soaring insurance costs.

But the benefit package that Costco employees get in return is particularly rich. The company chips in $12,000 to $19,000 per employee (depending on whether they are full- or part-time). In the end, Costco’s contribution is at least a third higher than that made by supermarket employers to their workers’ health benefit plan.

If Costco has a weak spot, it is on the bottom line. The company earns about 1.7 cents for each dollar of sales, compared with 2.5 cents or more for the supermarket chains and 3.5 cents for Wal-Mart.

Wall Street contends that one reason for this shoddy showing is Costco’s generosity to its employees. Above all, as Costco executives have watched the turmoil at the grocery chains, they have been reminded about all that they are doing right.

“I don’t see what’s wrong,” Sinegal says, “with an employee earning enough to be able to buy a house or having a health plan for the family.”

http://www.latimes.com/business/careers/work/la-fi-flan15feb15,1,7018352.column?coll=la-headlines-business-careers

Comment: The reality? In this instance, a conscientious employer, who believes that employees should be adequately covered for comprehensive health care benefits, is paying $19,000 for a $41,000 employee, and that doesn’t even include the employee’s contribution. This amounts to about one-third of compensation being received as health benefits (minus retirement benefits). Obviously, at that rate, an employer cannot remain competitive with other businesses that slash health care benefits.

Relinquishment of adequate profits cannot be considered a realistic option for funding employee health care. Reduction of employee compensation to below subsistence levels is not satisfactory either. Employer sponsored coverage inevitably is reflected in higher consumer prices. Inequitable provision of employee health benefits places the conscientious employer at an unfair competitive disadvantage with business owners who reduce prices by depriving employees of adequate compensation packages.

In 2004, we’re already spending $1.79 trillion or $6167 per person on health care. Placed in a single, universal risk pool that would amount to more than
enough to fund a comprehensive benefit package for everyone. Then,instead
of relying on the diminishing supply of conscientious employers and the diminishing clout of union negotiators, we should rely on sound tax policy to establish an equitable method of funding our universal risk pool.

If we fail to change to an equitable system of funding health care, we will force concerned employers into an untenable position. In order to survive in a competitive market, they will have to trim their contributions to the health plans. Then what will we have? Unaffordable care for those who really do need it.

But the rest of us will be fine… as long as we stay healthy.

The Japan Times
February 12, 2004
Visaless foreigners to be denied national health cover
By Tomoko Otake

After the Supreme Court ruled last month that it is illegal to bar Visaless foreigners from the national health insurance scheme, the health ministry is mulling the creation of an ordinance to do just that.

The top court for the first time recognized that foreigners who Overstay their visas have the right to join the national health insurance plan as long as they are likely to maintain a stable living, have registered with the municipalities where they reside and have applied for special residency permits.

The Supreme Court ruled as illegal a 1992 notice issued by the head of The health ministry’s national insurance plan section that excluded Foreigners with visas valid for less than a year from the nation health insurance plan.

http://www.japantimes.co.jp/cgi-bin/getarticle.pl5?nn20040212b3.htm

Comment: A debate also rages on in the United States as to whether undocumented residents should be covered. But there is a major, glaring difference between the United States and Japan in the fundamentals of this debate. Japan actually has a national health insurance system which theoretically could cover visaless foreigners; we don’t.

Health care spending for 2004

Health Affairs
February 11, 2004
Health Spending Projections Through 2013
By Stephen Heffler, Sheila Smith, Sean Keehan, M. Kent Clemens, Mark
Zezza, and Christopher Truffer

Projected spending for 2004:

National Health Expenditures (NHE): $1.7936 trillion

NHE per capita: $6,167

NHE, as percent of GDP: 15.5%

The current combination of sharply accelerating health spending, labor markets that have yet to fully recover, and rising budget deficits may be reviving thoughts about cost containment. Although it is unclear what direction new efforts to restrain health costs might take, historical behavior suggests that a continued escalation in health spending of the magnitude of recent experience will likely spur efforts to contain ths growth. The form that these efforts take can be expected to shape the nature of health care financing and delivery over the coming decade.

http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.79

Comment: Health care spending continues to increase well in excess of the rate of inflation. Dramatic changes in health care financing are already taking place as each sector attempts to contain its own health care costs. The sector with the least control is also the most vulnerable: patients with significant health care needs.

Rather than shifting funding to individual patients, making health care less and less affordable, let’s adopt a system that will remove financial barriers to beneficial care. A single, publicly administered system could contain costs while ensuring that care would always be there for those who need it.

The New York Times
February 10, 2004

Health Insurance for All

To the Editor:

The Senate majority leader, Bill Frist, states that “it is impossible” to have all Americans covered by health insurance (news article, Feb. 7). Infact, it would be impossible if we were to follow the incremental strategies that have dominated the health care reform process in the past decade.

But that process has been broadened to include consideration of the single-payer model. Numerous studies have shown that a publicly administered, single insurance system would not only cover everyone but also provide comprehensive benefits. And it would provide economic mechanisms that would address the nation’s greatest concern about health care: ensuring affordability for each individual and for society as a whole.

We should no longer allow our politicians and policy makers to dismiss the most effective and affordable model of reform simply because of concerns about political feasibility.

DON McCANNE, M.D.
San Juan Capistrano, Calif.
Feb. 7, 2004
The writer is a former president of Physicians for a National Health
Program.

http://www.nytimes.com/2004/02/10/opinion/L10HEAL.html

Archives of Internal Medicine
February 9, 2004
Single-Payer National Health Insurance
Physicians’ Views
By Danny McCormick, David Himmelstein, Steffie Woolhandler, David Bor

We surveyed a random sample of physicians in Massachusetts… When asked which structure would provide the best care for the most people for a fixed amount of money, 63.5% of physicians chose a single-payer system; 10.7%, managed care; and 25.8%, a fee-for-service system.

Conclusions: Most physicians in Massachusetts, a state with a high managed care penetration, believe that single-payer financing of health care with universal coverage would provide the best care for the most people, compared with a managed care or fee-for-service system. Physicians’ advocacy of single-payer national health insurance could catalyze a renewed push for its adoption.

http://archinte.ama-assn.org/cgi/content/abstract/164/3/300