Kip:

I think we can put this baby to bed as follows:

1. It is agreed that, relative to keeping the elderly in the traditional Medicare (enhanced by a drug benefit), funneling the same tax dollars through private health plans will either not buy the elderly the same health care services or the elderly have to put extra money on top. Thus, for the health plans or anyone else to sell that idea, they would have to convince us that for the same money, we will get different services that will represent higher quality care (e.g., through disease management). That is a hope but not a reality.

2. On the role of managed care during the 1990s, I agree that there is something to all of your arguments–the insurance cycle, the Hillary effect, and so on–but I am struck that when I plot real health spending per capita from 1965 to 2000, how smooth that line basically has been, in spite of insurance cycles and preemptive lying-low in the face of cost-containment talk in the past several decades. There has never been such a dramatic bending down of that curve as occurred during 1922-1997-8. Furthermore, I find it hard to believe that the discounts the plans wrung out of providers and the reduction in ALOS did not yield at least some savings.

Thus, I conclude that this argument is not settled and that the data allows us each to our maintain hypotheses.

3. As to Luft and Miller, they presented a truly detailed revisit of their earlier study last year at a conference. Once again, the results were inconclusive. I will not accept it as a working hypothesis that managed care lowered the quality of the patient’s health care, although it did probably lower the quality of some providers’ life.

Best regards,

Uwe

Sullivan responds to Reinhardt Kip Sullivan responds to Uwe Reinhardt:

From Uwe Reinhardt’s last message:

<< As to Luft and Miller, they presented a truly detailed revisit of their earlier study last year at a conference. Once again, the results were inconclusive. >>

Kip Sullivan:

Uwe, Do you know if Luft and Miller’s new review excluded studies that didn’t control for coverage differences? If it did not, why do you give its conclusions any credability

The most galling of the studies cited by Miller-Luft in their 1994 and 1997 reviews were studies that compared doctors treating Medicare patients in HMOs with doctors treating patients in FFS Medicare without controlling for coverage differences. The complete scam works as follows:

(1) Taxpayers overpay Medicare HMOs,
(2) Medicare HMOs use the subsidy to pay for better coverage (e.g., cancer screens),
(3) researchers with a fondness for HMOs come along and examine whether Medicare HMO docs are better than Medicare FFS docs on process measures (e.g., use of cancer screens) and outcome measures (e.g., stage of cancer at diagnosis) likely to be affected by the coverage difference and,
(4) lo and behold, the HMO docs come out looking better.

I think the scholars who wrote these studies, the editors who accepted them for publication, and others like Miller and Luft who describe them as unusually good studies, are guilty of thought processes so flabby their behavior rises to the level of malpractice.

Evidence-based medicine is now the new religion within the American health policy community. But the health policy community has yet to apply the same standard to itself. If a group of doctors conducted a study comparing the effectiveness of Drug A to Drug B, and they deliberately set it up so that the group getting Drug A took drug A on schedule because they had excellent drug coverage, while the group getting Drug B took Drug B erratically because they had no health insurance, they would be laughed out of the profession. Not so in the health policy community. Health policy analysts who design such shabby experiments are held up as scientists par excellence.

Do you agree with my statement that studies that compare docs treating un- or under-insured FFS patients with HMO docs treating fully insured patients are studies so flawed they shouldn’t be published, much less held up by Miller-Luft as among the 44 best studies published between 1980 and 1997? Can you tell me if Miller-Luft’s new review examined only those studies that controlled for coverage differences?

Thanks.

Kip

Kip:

I think we can put this baby to bed as follows:

1. It is agreed that, relative to keeping the elderly in the traditional Medicare (enhanced by a drug benefit), funneling the same tax dollars through private health plans will either not buy the elderly the same health care services or the elderly have to put extra money on top. Thus, for the health plans or anyone else to sell that idea, they would have to convince us that for the same money, we will get different services that will represent higher quality care (e.g., through disease management). That is a hope but not a reality.

2. On the role of managed care during the 1990s, I agree that there is something to all of your arguments–the insurance cycle, the Hillary effect, and so on–but I am struck that when I plot real health spending per capita from 1965 to 2000, how smooth that line basically has been, in spite of insurance cycles and preemptive lying-low in the face of cost-containment talk in the past several decades. There has never been such a dramatic bending down of that curve as occurred during 1922-1997-8. Furthermore, I find it hard to believe that the discounts the plans wrung out of providers and the reduction in ALOS did not yield at least some savings.

Thus, I conclude that this argument is not settled and that the data allows us each to our maintain hypotheses.

3. As to Luft and Miller, they presented a truly detailed revisit of their earlier study last year at a conference. Once again, the results were inconclusive. I will not accept it as a working hypothesis that managed care lowered the quality of the patient’s health care, although it did probably lower the quality of some providers’ life.

Best regards,

Uwe

Sullivan responds to Reinhardt Kip Sullivan responds to Uwe Reinhardt:

From Uwe Reinhardt’s last message:

<< As to Luft and Miller, they presented a truly detailed revisit of their earlier study last year at a conference. Once again, the results were inconclusive. >>

Kip Sullivan:

Uwe, Do you know if Luft and Miller’s new review excluded studies that didn’t control for coverage differences? If it did not, why do you give its conclusions any credability

The most galling of the studies cited by Miller-Luft in their 1994 and 1997 reviews were studies that compared doctors treating Medicare patients in HMOs with doctors treating patients in FFS Medicare without controlling for coverage differences. The complete scam works as follows:

(1) Taxpayers overpay Medicare HMOs,
(2) Medicare HMOs use the subsidy to pay for better coverage (e.g., cancer screens),
(3) researchers with a fondness for HMOs come along and examine whether Medicare HMO docs are better than Medicare FFS docs on process measures (e.g., use of cancer screens) and outcome measures (e.g., stage of cancer at diagnosis) likely to be affected by the coverage difference and,
(4) lo and behold, the HMO docs come out looking better.

I think the scholars who wrote these studies, the editors who accepted them for publication, and others like Miller and Luft who describe them as unusually good studies, are guilty of thought processes so flabby their behavior rises to the level of malpractice.

Evidence-based medicine is now the new religion within the American health policy community. But the health policy community has yet to apply the same standard to itself. If a group of doctors conducted a study comparing the effectiveness of Drug A to Drug B, and they deliberately set it up so that the group getting Drug A took drug A on schedule because they had excellent drug coverage, while the group getting Drug B took Drug B erratically because they had no health insurance, they would be laughed out of the profession. Not so in the health policy community. Health policy analysts who design such shabby experiments are held up as scientists par excellence.

Do you agree with my statement that studies that compare docs treating un- or under-insured FFS patients with HMO docs treating fully insured patients are studies so flawed they shouldn’t be published, much less held up by Miller-Luft as among the 44 best studies published between 1980 and 1997? Can you tell me if Miller-Luft’s new review examined only those studies that controlled for coverage differences?

Thanks.

Kip

The San Diego Union-Tribune
March 10, 2002
By Tony Fong

A handful of HMOs in California have begun offering plans that steer patients into selected hospitals where no co-payments are required. Patients who use nonpreferred hospitals are charged hefty co-payments, sometimes as much as hundreds of dollars a day.

And, starting next year, the PacifiCare HMO plans to divide medical groups and doctors into similar categories. Members who use “preferred” doctors will have lower co-payments and deductibles than members who don’t.

The new plans are similar to other managed-care models such as preferred-provider organizations plans, or PPOs, and point-of-service plans, or POS, except that they are part of HMOs. In effect, the plans are creating networks within existing networks.

Such a tiering of benefits is designed to funnel more patients to those providers that charge the health plans less, while forcing patients who use the more expensive networks to pay more of the cost themselves.

Health-care analysts say that such plans are here to stay.

Dr. Sam Ho, corporate medical director for PacifiCare, said tiering is viable now because there are more effective ways of measuring the quality of care and consumers are seeking greater choice in their health care.

“Our hospital costs were rising dramatically, and we had several options: We could raise prices to the hospitals, cut hospitals from our networks or cut benefits,” Epstein said (Tom Epstein, a spokesman for Blue Shield). “Or we could raise prices to our members.”

Health-care economists say that shifting costs onto consumers, however, leads to an inequitable health system in which the sickest patients and low-wage earners are most adversely affected financially.

Thomas Rice, a professor at the UCLA School of Public Health, said health insurance has historically operated on the principle that the healthy population should subsidize coverage for the sicker population, making it possible for low-wage earners to get care.

Shifting costs to consumers undermines that, experts said.

Larry Levitt, an analyst at the Kaiser Family Foundation:

“The more you charge patients at the point of service, the more you move away from insurance. It’s a matter of people getting different levels of care. You may get better care at the cheaper hospital than the more expensive one, but you don’t know because it’s based solely on costs.”

http://www.uniontrib.com/news/uniontrib/sun/business/news_1b10tiers.html

Comment: The prevailing rhetoric is that, in this age of consumerism, choice is being delegated to the patient-consumer who will control health care costs by becoming an empowered consumer. Let’s look at how this works.

Let’s begin with the first step, and that is choosing your health plan. What questions does the informed shopper need to ask?

What menu of health plans does my employer offer? Only one plan? So much for shopping!

But let’s assume that there is a menu of plans. Now what questions need to be asked?

Is my physician contracted with the plan? How do I find out? Those lists are difficult to locate and are frequently outdated as contracts continually change.

If my physician is contracted, is he or she in the less expensive tier? If I can’t even find out whether my physician is contracted, how can I find out which tier?

If not contracted in the right tier, are there other physicians in the less expensive tier that I can accept, even though it means leaving my current physician?

Which hospital does my physician use? Is it a contracted hospital? If so, which tier is it? But if we have only one hospital in our community and it is in the wrong tier, doesn’t that mean that I really don’t have any choice? Assuming there are a few hospitals, why do I have to go across town to that hospital with the bad reputation to qualify for the lower tier? But my physician isn’t on the staff of that hospital anyway? Do I really have any choice here?

And my employer has just announced that they are changing the health insurance contract in January? I have to start all over again!?

And those that do not have access to coverage through their employers and are dependent on the private market in health plans? Premiums are 30% higher than those for the employers. And the plans are rapidly shifting more costs to the beneficiary. Is an unaffordable policy with inadequate coverage really a choice?

Informed shoppers? Choice? When looking at what should be the simple process of merely choosing a health plan, we see that consumers in reality have very little choice. And now the health plans are shifting more costs to the consumers when they “choose” the more expensive tier when they often had no other option.

The health plans are not only nailing the patient-beneficiaries, but they are also going after the providers. One of the successes of managed care was to ratchet down the rates of the providers. The effectiveness of this strategy was so great that it drove many physician groups into bankruptcy. That left fewer groups that were now able to negotiate rates which would assure solvency. This is one of the reasons that we are seeing large premium increases again. Now the health plans are back with their ratchets to extort agreements selectively within their own list of cooperating, contracted providers. Ratchets are designed to move in one direction only. We can anticipate that health plans will only expand application of these policies that will further shift costs and risks to patients and their providers, making them useless as “insurers.” The health plans have literally become cut-throat organizations.

Choice is a good thing when it means that you can choose your physician and your hospital. But as long as we leave control in the hands of the health plans, we will not have choice, and we will be subjected to the extorting, cut-throat business practices of this worthless industry of middleman leeches.

All efforts at reform today continue to build on this nefarious industry. Enough! Let’s throw them out! Let’s adopt an equitable, publicly-administered program of universal health insurance. Then patients will have true choice within an industry of health care providers that are motivated to please patients rather than health plan executives.

Kip Sullivan responds to Uwe Reinhardt’s comments on Medicare HMOs, then Reinhardt responds to Sullivan, and then one more response by Sullivan:

Kip Sullivan:

Since we seem to agree on this question of whether managed care saved money for Medicare, let’s dispose of that issue first. When I said Medicare HMOs have driven up Medicare’s costs, I meant that Medicare HMOs are less efficient than the traditional Medicare program — that a dollar invested in Medicare HMOs buys less health care than a dollar invested in classical FFS Medicare. Are we in agreement about that? Your first sentence suggests you agree with me, but your second sentence citing the additional coverage most Medicare HMOs provide suggests you disagree or are unsure.

Uwe Reinhardt:

It is known from studies by Mathematica, MedPAC and others, that during the 1990s the HMOs did benefit from a favorable risk selection-whether it was deliberate cherry picking or accidental matters not. The benefits of favorable risk selection helped fund extra benefits–such as vision care, prescription drugs or the elimination of the Part B premium–that was bestowed on Medicare beneficiaries. Add support for these benefits may have come from some utilization control and, in California, from fees sometimes at 90% or so of Medicare’s own fee schedule. Aside from PacifiCare, most HMOs did not flow much added benefit to their bottom line. In general, having Medicare patients hurts an HMO’s stock–now even PacifiCare.

That was then. At this time, the mounting cost of these added benefits has outstripped whatever benefits HMOs may receive from favorable risk selection. Furthermore, whatever economies or price discounts the HMOs may have reaped in the 1990s have been harvested. It is the reason why so many HMOs are pulling out of Medicare+Choice.

I agree though that, as we look to the future, the cost of serving a given set of elderly patients through Medicare, enhanced by a drug benefit, is likely to be lower than giving the same elderly the same benefits through Medicare+Choice. Why? Because Medicare can probably do this at a loss ratio of 97%-98%, while HMOs are lucky to make any profit at a loss ratio of 90%. They will burn an extra 8-10 cents per dollar just on their higher SG&A and the profits they need to offer investors.

Consequently, if the HMOs want to play in this market, they must be able to look society in the eye and say: yes, going with us will raise somewhat the total annual health care cost per risk-adjusted elderly, but we will be able to offer a superior health care experience to the elderly for it. I have challenged many HMO executives to tell me what those added quality dimensions might be. Sadly, many of them still run on the cliché that anything the private sector does is, ipso facto, more efficient than anything government does, and therefore have not thought beyond it to rationalize a move towards Breaux-Frist.

I have found it as frustrating as you probably find it unsurprising.

Kip Sullivan:

When I suggested we debate your assumption that managed care has saved money and maintained or improved health, I was thinking we’d exchange perhaps a half dozen emails on these complex issues. But Don tells me that that much discussion is more than many members on this list are going to want to read, and has asked me to limit my rejoinder to just this email. To do that in one email, I’m going to have to cite two articles I wrote and leave it to you and other readers either to accept my conclusions or dig up the articles. That was not my original intention, though.

Does managed care save Medicare money?

We agree that managed care plans (MCPs) have not saved Medicare any money, and, because they have overheads that are extremely high compared to FFS Medicare’s, they are utterly incapable of ever saving Medicare any money. The only change I would make to your comments is that the overheads of MCPs probably average closer to 20 to 30 percent, not 10 percent.

Does managed care save the private sector money?

In your previous email, you based your claim that “managed care” saves money for the private sector solely on the lull in health care inflation that America enjoyed between 1992 and 1996. This strikes me as a very thin reed upon which to base the assertion that “managed care” saves money. If this is all you have to rely on, then I believe you should adopt my position, which is that the evidence on whether managed care saves money is inconclusive.

As you recall, I wrote an article for Health Affairs in which I reviewed the literature on whether managed care saves money (the literature doesn’t support that conclusion, not even for HMOs as opposed to PPOs), and then I presented an explanation for the 1992-96 inflation lull that did not rely on the never-documented assumption that managed care saves money (“On the ‘efficiency’ of managed care plans,” Health Affairs 2000; 19(4):139-148). I presented evidence that the inflation lull was caused by three factors: (1) a huge, record-breaking decline in the general inflation rate that began in 1991; (2) the predictable downturn in the three-year underwriting cycle that began in 1992; (3) merger fever that began late in 1992, triggered by a rush of endorsements of managed competition by state and federal politicians between the fall of 1992 and the spring of 1993, and the resulting low-balling of prices by players throughout the health-care industry; and (4) the delayed effects of the 1990-91 recession.

The rapid return of torrid premium and total-expenditure inflation in the late 1990s, despite the persistence of a low underlying inflation rate, adds weight to my conclusion that managed care had little or nothing to do with the mid-90s inflation lull. I predict we will see a slight reduction in the inflation rate in the next year or so, but this reduction will not be anything like the unusually long 1992-96 lull (precisely because three of the four factors I listed above will not be operative), and this decline will be temporary because it will merely reflect one of the four causes I listed above — a downturn in the underwriting cycle.

Does managed care improve quality of care?

Your claim that managed care improved the quality of health care in America (you made that statement to this list a year ago, and your recent emails imply you still adhere to) is not supported by any of the three big categories of evidence — anecdotal, polling and focus group data, and good research. Here I’ll just focus on the last category.

In 1994 and 1997, Robert Miller and Harold Luft published literature reviews claiming to find that medical care offered by FFS and MCP docs was equivalent. The 1997 Miller-Luft literature review was financed by the American Association of Health Plans, no less, and still Miller and Luft couldn’t bring themselves to conclude that quality of MCP care was superior, as you have argued. These reviews were, as of 2000, the most thorough literature reviews ever done on this question. (I haven’t been doing my homework as assiduously as I should have over the last 18 months, so I would appreciate being notified of any reviews published recently that members of this list believe are thorough and well done.)

I located and read every one of the 44 studies Miller-Luft cited in their two reviews to see for myself if I thought the studies used reasonable methodologies. To my surprise, I discovered that the great majority of these studies failed to control for differences in coverage between FFS and MCP patients. In all the studies, MCP patients had coverage for the type of treatment under consideration, but in many studies some or all of the FFS patients had inferior coverage (e.g., coverage for doctor visits but no drug coverage) or lacked any insurance at all.

Can you imagine my astonishment? How the heck does one draw any conclusions about the quality of care given to arthritis patients, for example, by HMO and FFS doctors if the FFS doctors are seeing large numbers of patients with no prescription drug coverage and $250 deductibles while the HMO docs are seeing patients with no copays for office visits and no drug coverage? But that’s what one of the studies cited by Miller-Luft did.

So, I weeded out all studies cited by Miller-Luft that failed to control for coverage differences (in doing this, I used a criterion favorable to MCPs). This reduced the number of comparisons from 57 to 44 (and the number of studies from 44 to 34). The outcomes of these 44 comparisons are shown below: __________________________________ MCP care was better than FFS care 4 MCP and FFS care were equivalent 19 MCP care was worse than FFS care 21 Total number of comparisons 44

Source: Kip Sullivan, “Managed care plan performance since 1980: Another look at two literature reviews,” American Journal of Public Health 1999;89:1003-1008. ____________________________________

You can see that MCP care was rarely superior to FFS care and often inferior to FFS care. I concluded, “the quality of care provided by MCPs tends to be equal or inferior to that provided by FFS plans.”

I sent Miller and Luft a copy of my article before I submitted it and asked for their thoughts. They never replied. But after my article was published, they asked the Am J Pub Health to publish an incoherent, rambling rejoinder, filled with euphemisms and cryptic phrases (e.g., “prototypical choices,” and “inherent aspect of the [FFS] ‘package'”), in which they defended studies that compared uninsured FFS patients with insured MCP patients. I tore their funny little letter to shreds with language my editor described as “caustic” (Miller and Luft, “A reply to Sullivan’s reanalysis of managed care plan performance since 1980;” Sullivan, “Sullivan responds,” Am J Pub Health 2000;90:984-986).

I believe the two Miller-Luft articles and my review of them constitute the most thorough reviews of the scientific literature on the question of quality of MCP and FFS care as of 2000. If you or anyone on this list would like to suggest literature reviews that you think were more thorough than the Miller-Luft reviews, and used more rigorous criteria than I did, I’d love to know about them.

You may wish to argue that 44 studies is not a lot to go on, and I would agree with you. But that’s not the issue before us. The issue is whether you or anyone else is justified in claiming that evidence indicates MCP care is superior. That evidence, slim though it is, supports the opposite conclusion.

Conclusions

So that’s my case in a nut shell. You claim Americans “trashed managed care.” I say, Bravo, they had every reason to trash managed care. Managed care has not demonstrated an ability to save money, and it has demonstrated an ability to damage quality of care and destroy patient privacy. If I had more time, I would argue that common sense tells us all three of these bad outcomes had to happen. But I’ll save that line of argument for your next email praising managed care.

Uwe Reinhardt responds to the comments of Theodore Marmor:

(The original comments of Dr. Marmor are reproduced, with the comments of Dr. Reinhardt added.)

Dr. Marmor:

Uwe–your arithmetic was helpful to see what is at work with projections of future national income and what one scenario forecasts for health expenditures as a proportion of that national income. But arithmetic neither produces plausible predictions (as against conditional forecasts) and, more important, does not provide the grounds for analysis of that future. (Were CBO forecasts in 1993 l8% of GNP for health by 2000? That was their forecast!)

Dr. Reinhardt:

It was projected to be 19.7%, Ted (October, 1993–I still have the paper). How could you err by so much!

Dr. Marmor:

I particularly want to contest your claim (repeated often by you) that “Americans have signaled that they don’t want any cost control at all….” Kip challenges your claims about the effects of what is called managed care.

Dr. Reinhardt:

I attach a chart on real health spending per capita (not included in this message). Either you or Kip must explain to us all what caused the trend line to bend. We know it was not Medicare, because that kept right on its growth path until the BBA ’97. So I shall temporarily concede–against superior authority–that managed care had nothing to do with it and await yours or Kip’s explanation.

Dr. Marmor:

I want to challenge your interpretation of the connection between what mass American wants and both public and private policy. It is decades too late to continue to repeat the fallacy of revealed preference in politics. It does not follow that because outcome A takes place, the citizens of that jurisdiction ‘wanted’ A. It might be, but the use of the effect to specify the cause is a logical fallacy. Until and unless you can find reason to believe mass opinion shaped events decisively, stop blaming the victim.

Dr. Reinhardt:

Again, I must defer here to superior authority. I am not a political scientist. What I await from you, Ted–perhaps all of us do–is a concise, short explanation of how democracy works in America. As an example, explain to me why the election of 1994 had nothing to do with voter preferences–among others about government’s role in health care. Throw in a convincing–but concise–explanation of why the referendum in California on a single-payer plan did not work. Always eager to learn.

Dr. Marmor:

I don’t for a moment believe the American mass public has any clear idea about the extent to which cost control arguments are true, false, or misleading.

Dr. Reinhardt:

And how do you know that?

Dr. Marmor:

Our political system is far too structured against mass majority rule to explain health policy outcomes as the result of their ‘wishes.’ Sure, a different distribution of wants and attitudes might make some policies more likely, but the locomotive conception you use is genuinely misleading and unsupported, as I have mentioned before, by the public opinion literature.

Dr. Reinhardt:

Too vague, Ted. Too vague. This is you in your old mode. As you know, I don’t groove on it. For example, I could simply assert that your statement here is genuinely misleading and unsupported, and leave it at that.

No, Ted, I would like you to explain to me why voters’ attitudes about the role of government in health care has nothing to do with the demise of the Clinton plan and the ascendancy of Republican rule in the House.

Finally, Ted, since you infer that you may know, please tell me once and for all what the American people really want in health care. I suggest a concise list. In return I shall compose what I think they want.

March 8, 2002

“Human dignity, private property, free speech, equal justice, education, and health care – these rights must be guaranteed throughout the world.”

http://www.whitehouse.gov/firstlady/news-speeches/speeches/fl20020308.html

Yesterday, Dr. Reinhardt commented on the projections of health care expenditures made by the Office of the Actuary at the Centers for Medicare and Medicaid Services. That report is now available online at:

http://www.hcfa.gov/stats/nhe-proj/proj2001/Proj2001.pdf

The abstract of the Health Affairs article is also now available (the full article is available only to subscribers or by purchase):

http://130.94.25.113/1130_abstract_c.php?ID=http://130.94.25.113/Library/v21n2/s25.pdf

One quote from the Health Affairs article is noteworthy:

“After 2002, growth is projected to gradually slow to 5.9 percent by 2011. This deceleration can be primarily attributed to slower projected per capita real income growth, a move toward more restrictive forms of managed care, a rise in the uninsured population, and an increase in the use of consumer cost sharing.”

Comment: We don’t have much control over per capita income growth, but the other three factors are cruel and inhumane mechanisms of slowing the growth of health care costs. Instead of continuing to erect more financial barriers to care, we could replace those mechanisms with a globally-budgeted, publicly administered program of universal health insurance. Excess growth would be constrained, but in an equitable and humane manner.

Theodore Marmor responds to Uwe Reinhardt:

Uwe–your arithmetic was helpful to see what is at work with projections of future national income and what one scenario forecasts for health expenditures as a proportion of that national income. But arithmetic neither produces plausible predictions (as against conditional forecasts) and, more important, does not provide the grounds for analysis of that future. (Were CBO forecasts in 1993 l8% of GNP for health by 2000? That was their forecast!)

I particularly want to contest your claim (repeated often by you) that “Americans have signaled that they don’t want any cost control at all….” Kip challenges your claims about the effects of what is called managed care. I want to challenge your interpretation of the connection between mass American wants and both public and private policy. It is decades too late to continue to repeat the fallacy of revealed preference in politics. It does not follow that because outcome A takes place, the citizens of that jurisdiction ‘wanted’ A. It might be, but the use of the effect to specify the cause is a logical fallacy. Until and unless you can find reason to believe mass opinion shaped events decisively, stop blaming the victim. I don’t for a moment believe the American mass public has any clear idea about the extent to which cost control arguments are true, false, or misleading. Our political system is far too structured against mass majority rule to explain health policy outcomes as the result of their ‘wishes.’ Sure, a different distribution of wants and attitudes might make some policies more likely, but the locomotive conception you use is genuinely misleading and unsupported, as I have mentioned before, by the public opinion literature.

Ted Marmor

Theodore R. Marmor Professor of Public Policy & Management Professor of Political Science Yale University School of Management

Beth Capell, Ph.D., responds to the Reinhardt and Sullivan comments:

As one of the prime architects of the California HMO Patient Bill of Rights (with much guidance from our CaPA leaders), one key observation:

The HMOs had promised to deliver all medically necessary and appropriate care–and were required by California law to do so. Every dime of cost they attributed to the Patient Bill of Rights was proof that they were denying necessary and appropriate care.

Time and again in the negotiations over the Patient Bill of Rights the HMOs were caught in this trap: if HMOs were giving people the care they needed, what was the problem with requiring them to do so? Contraceptives, diabetes management, independent medical review, second opinion, you name it: if consumers were getting the care they should, the reform cost nothing. If the reform cost money, it demonstrated a denial of care. An analysis by a Senate Insurance Committee skeptical about so-called mandates found little if any cost associated with most of them.

The one exception to this case was mental health parity where plainly consumers were not getting care they should have. This provision unquestionably cost purchasers money—because by failing to provide decent mental health coverage, the purchasers and the HMOs had shifted costs to the public sector and simply failed to provide needed care.

And costs in California were rising well before HMO reform was fully enacted in late 1999.

Beth Capell, on behalf of the California Physicians Alliance.

Theodore Marmor on the predictions of the Office of the Actuary:

Watch out for the idea that projections are anything but forecasts whose validity is utterly dependent on the accuracy of the premises. They can be useful for sensitivity analysis. But anyone who thinks you can predict economic and medical life 10 years hence needs medical care.

Theodore R. Marmor Professor of Public Policy & Management Professor of Political Science Yale University School of Management

The Center for Medicare and Medicaid Services, in new projections released today in Health Affairs, estimates that health spending will more than double to $2.8 trillion by 2011 and climb to more than 17 percent of the GDP over the next decade, up from 13.2 percent currently.

Uwe Reinhardt, Ph.D., James Madison Professor of Political Economy, Princeton University, comments:

$2.8 trillion sounds like an awesome lot; but Americans better get used to the idea. Several factors drive that spending figure:

1. There’s expensive new technology on the horizon, and not all of it is money saving. Much of it enhances the quality of care and life, at greater expense.

2. We are facing a growing labor shortage in health care, and not only in nursing. There is likely to be even a renewed physician shortage. We must get used to paying health workers more.

3. By trashing managed care as they did, Americans have signaled that they do not want to have any cost control at all in health care. They seem willing to spend (more correctly: to have someone else spend) whatever it takes, even on care that is known to be only marginally useful or even useless. Yes, Americans do sincerely believe that, if insured, they have a Constitutional right even to useless care. It’s the American way.

All of these factors spell increased health spending, and I see nothing on the horizon to slow it down, short of seriously rationing health care by ability to pay even for insured Americans (e.g., through MSAs). And even that may not work, because with MSAs the piece of health spending called “catastrophic” would be likely to increase more rapidly.

Even so, there’s a brighter side. We have no cause to jump off a bridge.

According to the CBO, GDP in 2001 was $10.193 trillion. It is projected to be $16.676 trillion in 2011. According to the most recent CMS data, total national health spending in 2001 was $1.378 trillion. It is projected to be $2.8 trillion by 2011. Thus, in 2001 we had (10.193 – 1.378) = $8.815 trillion of non-health GDP left over after the health sector took its slice of 31.2% of the GDP pie. In 2011 we are projected to have (16.676-2.8) = $13.876 trillion of non-health GDP left over. This is an increase of (13.876-8.815) = $5.061 trillion in non-health GDP, or a percentage increase of (5.061/8.815) = 57.4%. It is equivalent to an average annual compound growth rate of 4.6% over the period 2001-2011. That ain’t bad, is it? We can live with it.

I see it in your eyes: you are asking me, “But what about inflation?” Ok, here are the numbers. The CBO projects an average annual increase in the GDP deflator of about 2% over the period 2001-2011. If we deflate the non-health GDP projected for 2011 by that inflation factor, the $13.876 in 2001 dollars projected above becomes $11.383 in constant year-2001 dollars. Thus, in terms of real purchasing power, non-health GDP in 2011 is projected to be (11.383-8.815) = $2.568 trillion more than it was in 2001. This represents an increase in real non-health GDP of 2.568/8.815 = 29%. It is equivalent to an average annual compound increase of 2.589% over the period 2001-2011. Still ain’t bad, is it?

I sense that you are still not happy. You wonder about population growth. “Aren’t there more people to claim all that extra non-health GDP? May there be less per capita, then?” you wonder. Ok–here it goes. Our population is projected to grow at an average annual compound rate of slightly less than 1% (0.9% really). Therefore, we can say that real (constant dollar) non-health spending per capita in the US is projected by the CBO to increase by about 2.589% – 1% = 1.589% per year between 2001 and 2011 (1.6% between friends). That ain’t bad either, is it?

Can we really look up to God and cry over it? Can we tell God that, in view of the looming $2.8 trillion in health spending in 2001, we cannot possibly give the elderly prescription drug coverage or extend health insurance coverage to all uninsured Americans, because that would spend us into the poorhouse?

My conjecture is that God won’t be impressed, nor will President Bush’s most highly regarded philosopher: Jesus Christ. I think we had better do the Judeo-Christian thing vis a vis the uninsured, lest there be locusts and frogs and stuff all over the country, as once it was in Egypt.

Kip Sullivan responds to Uwe Reinhardt:

Uwe Reinhardt’s previous statement:

<< By trashing managed care as they did, Americans have signaled that they do not want to have any cost control at all in health care. They seem willing to spend (more correctly: to have someone else spend) whatever it takes, even on care that is known to be only marginally useful or even useless. Yes, Americans do sincerely believe that, if insured, they have a Constitutional right even to useless care. It's the American way. >>

Kip Sullivan’s response:

Uwe,

I agree with your demand that Congress insure the uninsured. But I disagree with the remarks above about Americans’ attitudes toward managed care. These remarks rest on two assumptions: (1) That managed care has been demonstrated to cut national health care expenditures or, at minimum, total health spending by the private sector, and (2) that managed care cuts out only “useless care,” not necessary care, and, therefore, has not damaged quality of care.

You didn’t articulate these assumptions, so I’m asking you if you endorse those assumptions. Do you? If you say yes, I will challenge you on both of them. I believe the evidence supports the following conclusions:

(1)(a) the evidence that managed care saved money for the private sector is inconclusive; (b) the evidence indicates permitting managed care companies to enroll Medicare beneficiaries has added to, rather than reduced, Medicare’s costs; and

(2) the evidence supports the conclusion that the spread of managed care damaged quality of care.

These are complex issues, and I’m pressed for time these days, so I might take awhile responding to you. But I think these issues are too important, and your view too incorrect, to let your comment go by unquestioned.

Thanks much.

Kip Sullivan

Uwe Reinhardt responds to Kip Sullivan:

The original remarks are reproduced, and Dr. Reinhardt’s additional comments are marked ***

Kip Sullivan responds to Uwe Reinhardt:

Uwe Reinhardt’s previous statement:

<< By trashing managed care as they did, Americans have signaled that they do not want to have any cost control at all in health care. They seem willing to spend (more correctly: to have someone else spend) whatever it takes, even on care that is known to be only marginally useful or even useless. Yes, Americans do sincerely believe that, if insured, they have a Constitutional right even to useless care. It's the American way. >>

Kip Sullivan’s response:

Uwe,

I agree with your demand that Congress insure the uninsured. But I disagree with the remarks above about Americans’ attitudes toward managed care. These remarks rest on two assumptions: (1) That managed care has been demonstrated to cut national health care expenditures or, at minimum, total health spending by the private sector, and (2) that managed care cuts out only “useless care,” not necessary care, and, therefore, has not damaged quality of care.

You didn’t articulate these assumptions, so I’m asking you if you endorse those assumptions. Do you? If you say yes, I will challenge you on both of them. I believe the evidence supports the following conclusions:

(1)(a) the evidence that managed care saved money for the private sector is inconclusive;

*** What, then, is your explanation for the deceleration of the growth in health spending during the 1990s?

(b) the evidence indicates permitting managed care companies to enroll Medicare beneficiaries has added to, rather than reduced, Medicare’s costs; and

*** I can buy that. it also, of course, has added benefits. If you don’t believe me, ask the elderly. Why else would they whine when they have to go back to Medicare?

(2) the evidence supports the conclusion that the spread of managed care damaged quality of care.

*** I don’t buy that one.

These are complex issues, and I’m pressed for time these days, so I might take awhile responding to you. But I think these issues are too important, and your view too incorrect, to let your comment go by unquestioned.

Thanks much.

Kip Sullivan

North County Times
3/10/02
By Bruce Kauffman

OCEANSIDE —- An advocate for reform of the nation’s health care system said Saturday that medical bills will become the number one cause of bankruptcy in America if administrative costs are not curbed and insurance coverage is not made more available.

Speaking at a conference presented by the North Coast chapter of the League of Women Voters, Don McCanne, a retired Orange County physician who is active in Physicians for Social Responsibility, criticized insurers and the health-care industry for spending up to roughly one of every four dollars in resources on administration.

“Just handling the money burns up a lot of funds,” McCanne said.

McCanne said bringing administrative overhead down to 10 percent would save a quarter of a trillion dollars, money that could pay the health care needs of a “rapidly expanding group” of people with inadequate or no insurance. That group may include some 85 million Americans, he said.

Said another speaker, Gregory Knoll, director of the consumer center for health education and advocacy of the Legal Aid Society of San Diego: “Here’s the deal —- access to quality health care ought to be a constitutional right. If we don’t look at how we’re going to change this system and delve into it and make it work for everybody, we’ve got a problem.”

http://www.nctimes.net/news/2002/20020310/53941.html

Comment: At the conference the point was made that employers and insurers were shifting more costs and risks to employee-beneficiaries. For individuals with significant medical problems, the out-of-pocket expenses are beginning to exceed disposable income. An continuation of this trend may result in insolvency for enough individuals such that unpaid medical bills could move into first place as a cause of bankruptcy.

Also, the shifting of costs from administration to patient care was shown to be achievable based on the preliminary results of the California Health Care Options Study. Replacing the fragmented, inefficient system of private and public plans and no health plans at all, with a single, publicly administered insurance program, would save enough to pay for comprehensive health care benefits for everyone.

The Alan Guttmacher Institute
March, 2002

“From adolescence on, most men need information and counseling about sexual and reproductive matters, and they need somewhere reliable to go for related education and health care.”

“Obstacles to care include the tendency of many men not to seek regular, routine checkups; the fact that health insurance often does not cover the services men need; and the high proportions of men–particularly poor men–who do not have health insurance.”

http://www.guttmacher.org/pubs/exs_men.html

Comment: The impact of lacking adequate health insurance coverage is ever pervasive.

COMMONWEAL
February 22, 2002

“HEALTH CARE FOR ALL”
“A conservative case” By Donald W. Light

“Now that South Africa has legislated universal access to medical services, the United States remains the only industrialized or second-tier country in the world that fails to guarantee its citizens access to medical services. This is a curious omission for a country based on rights and liberty. It is equally strange from an economic and business point of view. For while foreign competitors get full medical benefits at one-third the cost, American employers are weighed down by ever-growing expense for health care.”

“Universal access to needed medical services is essential to achieve the four traditional conservative moral principles: the anti-free-riding principle, the principle of personal integrity, the principle of equal opportunity, and the principle of just sharing.”

“For too long, we have ignored or opposed efforts to simplify the American health-care system, at a cost of ill-spent billions. Today’s system not only fails hospitals, physicians, patients, and families, but is collapsing under the burden of its own complexity and inefficiency. It is possible to design a low-cost universal plan that maximizes choice. The time to do it is now.”

http://www.commonwealmagazine.org/ and click on the image of the magazine, and then click on “HEALTH CARE FOR ALL.”

Comment: Most proponents of capitalism believe that human capital is one of our most important investments and a key to the success of capitalistic economies. Dr. Light states well the conservative case for universal access to needed medical services which can only enhance an individual’s opportunity and productivity. Everyone concerned about health care reform should read this article.

The Deseret News
March 7, 2002
By Twila Van Leer

“Americans have no constitutional right to health care, but the perception is so strong that such care should be a basic right that the country is likely to have a socialized system sometime in the near future, Dr. C. Everett Koop said Thursday.”

“Answering the question raised in the title of his talk, ‘The Right to Health Care: Has the Time Come?’ Koop had an emphatic ‘no. The time never will come when health care is a right.'”

“Regardless, public polls have shown increasingly large numbers of Americans who believe health care should be a basic right, he said. ‘And they think they should get health care as good as a millionaire gets.'”

“Koop urged those in the medical ranks to ‘take the high road of professionalism,’ to adopt the higher ethic of self-sacrifice… ‘Do the right thing for those for whom health care is not yet a right.'”

http://deseretnews.com/dn/view/0,1249,375014476,00.html?textfield=Koop

Comment: Is Koop campaigning to get his old job back?

Senate Finance Committee
March 7, 2002
“The Administration’s FY 2003 Budget Proposals for Prescription Drugs”

Excerpts of testimony of Bob Kerrey, representing the Concord Coalition:

You have invited me to testify on the question of adding a prescription drug benefit to Medicare. My simple advice is don’t do it. Not unless you are prepared to make fundamental reforms in the way Americans finance the cost of their health care.

Members of the Finance Committee, I do not think that doing nothing is an option. Americans can afford a prescription drug benefit but I do not believe we can afford to add it to Medicare as it is currently structured. More challenging I do not believe we can solve this problem by focusing on benefit changes or reductions in reimbursements to providers. Instead I believe we need to focus our attention on fundamental reform of the way Americans become eligible under Federal law for health insurance.

Though intuition is often a good guide when making decisions sometimes it fails us. In this case intuition signals that we should narrow the scope of our Federal health care entitlement programs in order to save money. However, I believe the counter-intuitive choice, namely to expand the entitlement, is the least costly choice.

I urge you to consider that for budgetary, economic and moral reasons we cannot get from where we are now to where we want to go by adding a new and expensive benefit to an entitlement program. Nor can we get there by just reforming existing programs. We can only get there by fundamentally altering the way we become eligible for insurance in the first place.

Beginning with a universal entitlement does not mean higher spending or more governmental interference with the choices made by patients or providers. In truth it could mean a lot less of both. It would mean that we would start thinking about ourselves as a single group of 280 million Americans who are all part of the same health system and who all need to face the challenge of matching our appetite for quality with our capacity to pay.

http://finance.senate.gov/hearings/testimony/030702bktest.pdf

Comment: Raise the flags and fire the flares!

The Concord Coalition has been the leading voice for responsible restraint in the funding of our programs of social insurance, Medicare and Social Security. Former Sen. Kerrey, in representing the Coalition, has clearly stated that a universal health insurance program is probably the most fiscally responsible approach to “matching our appetite for quality with our capacity to pay.”

To the towers and ring the bells! All of America must hear this great news!

The Associated Press
March 7, 2002
By Curt Anderson

“The decision to go with a consensus approach (on an economic stimulus plan) came after House GOP leaders ran into criticism at a Wednesday meeting of the rank-and-file, when some lawmakers questioned an earlier, tentative decision to vote on a bill combining a controversial health care tax credit with an extension of jobless aid.”

http://www.washingtonpost.com/wp-dyn/articles/A53875-2002Mar7.html

Comment: The extension of jobless aid had strong bipartisan support, but it was being held hostage to health care tax credits that were supported by special interests. These credits would have expanded and compounded the problems with our flawed policies in health care coverage. It is reassuring to know that enough of our elected representatives understood the problems with these seemingly benign but very treacherous tax credits so that they were able to take a strong stand in preventing this “compromise” in the name of political expediency. This skirmish was won, but the battle continues.

Medscape
February 26, 2002

Book Reviews
By J.D. Kleinke

Quotes from the review by Peter Frishauf:

“Noted health economist J.D. Kleinke once saw managed care as the solution to America’s healthcare problems… In 1998, he declared victory for the managed care solution in a controversial book, Bleeding Edge: The Business of Health Care in the New Century. Kleinke was wrong, as he acknowledges in his interesting new book, Oxymorons: The Myth of the U.S. Health Care System.”

One reason cited in Frishauf’s review:

“Parasitic middlemen, pointless regulation, and waste suck billions of dollars from premiums that could be redeployed to pay for care. Kleinke identifies 2 intertwined constituencies as prime culprits: the 5000 state insurance bureaucrats who preside over a ‘mess of state-based benefit mandate laws,’ and 50,000 health insurance brokers ‘in bed with them.’ The brokers, I was astounded to learn, collect commissions ranging from 3% to as much as 20% of the total cost of plans — a ‘shadow tax’ of some $300 billion per year on premiums, more than twice what the nation spends on all prescription drugs! Insurance companies, it seems, have been unable to break the stranglehold of brokers, and those that attempt to offer plans without brokers face massive retaliation.”

http://www.medscape.com/viewarticle/423369?srcmp=pc-030102&WebLogicSession=PIY1zyJbzgG1V0H6WXcC53TCwQTRlAlT1hVP7PHJ8sBGl6Ql58rh|-1144767244009827815/-1408233355/6/7001/7001/7002/7002/7001/-1

The New York Times
March 4, 2002

“2 Powerful Groups Hold Sway Over Buying at Many Hospitals” By Walt Bogdanich

“These two private groups (Premier and Novation) act as middlemen for about half the nation’s nonprofit hospitals, negotiating contracts last year for some $34 billion in supplies, from pharmaceuticals to pacemakers, bandages to beds.

“Each group has the same basic mission: to use the market power of its more than 1,500 hospitals to find the best medical products at the lowest prices.

“But many in the medical world – Mr. Kiani among them – question whether that mission is being compromised by financial ties that the groups, Premier and Novation, have to medical supply companies, ties that, according to an investigation by The New York Times (news/quote), are both extensive and highly unusual.

“The problem begins with this simple fact: The buying groups are financed not by the hospitals that buy products but by the companies that sell them. In other words, the groups take money from the very companies they are supposed to evaluate objectively. Each year, companies pay Premier and Novation hundreds of millions of dollars in fees that represent a percentage of hospital purchases. The more hospitals spend on medical supplies, the more dollars Premier and Novation get from the suppliers.

“In a few cases, Premier or some of its officials have also received stock or options from companies with which Premier contracts.

“Critics say such conflicts of interest can mean that the buying groups do not always choose the products that are best for patients, hospitals or the taxpayers and insurers that pay their bills.”

“Larry Dickson oversees purchasing through Novation for Providence Health System in Seattle.. He says he cannot get specific information on fees, despite the critical role he plays in supplying his hospitals.”

Larry Dickson, purchaser for Providence Health System:

“Why is this so secret? There is an accountability question that is very much concerning a lot of people in health care. And if you ask, and the response you get is, ‘That’s none of your business,’ that raises more questions than it answers.”

http://www.nytimes.com/2002/03/04/business/04BUY.html

Comment: This is yet one more example of marketplace dynamics in our health care system. Theoretically, these middlemen organizations negotiate discounts with the manufacturers of the medical supplies. Bulk purchasing and negotiated pricing are very legitimate methods to help control health care costs. But, because of this business model, most of the benefit passes to the shareholders and executives, with only enough savings passed on to the hospital-providers to create some semblance of lower pricing. With only two major middlemen, this oligopolistic market borders on a monopoly, preventing the realization of the full potential benefit for the hospitals and ultimately the patients.

Another concern about oligopolistic middlemen medical suppliers, which would apply to the oligopolistic pharmacy benefit managers as well, is that competitive bidding will negatively impact the manufacturers that do not receive the contracts, and some of them could actually fail. Those that would remain might defensively increase merger activity and would thereby create an oligopoly of manufacturers. With the oligopolistic middlemen already in place, prices would be driven up sharply.

Consider the following:

National Bureau of Economic Research NBER Working Paper No. 8802 “Health Care and the Public Sector” By David M. Cutler, Ph.D., Professor of Economics, Harvard University

“The make or buy decision in health care has been a subject of debate for decades. The traditional debate pitted arguments of monopoly and monopsony on the one side, and innovation on the other. Government intervention was justified because of monopoly power of physicians and the information problems noted above (in his paper). By controlling medical provision, it was believed that the government could use its monopsony power to purchase such services at a low price. The counter-argument focused on incentives for efficiency. Without market incentives, it was feared that government production would be technologically inefficient and innovation would be stifled.

“Empirically countries where the public sector runs the medical system spend less on medical care than countries with private providers. In OECD countries, for example, the correlation between the public sector share of financing and the share of GDP devoted to medical care is -0.41. More formal analysis controlling for additional variables also finds this conclusion (Globerman and Vining, 1998). There is also evidence for the inefficiency view. People in many European countries are disenchanted with the quality of medical care, and these countries have struggled to increase the efficiency of the medical care system in recent years (Cutler, 2001).

“A recent literature emphasizing the role of public sector contracting has expanded the dimension of this analysis, considering issues of allocational as well as technical efficiency (Hart, Shleifer, and Vishny, 1997; Shleifer, 1998). Consider the question of whether a government should provide hospital services itself or contract with a for-profit hospital company to provide the services. For-profit companies will respond to financial incentives more rapidly than government-run companies, since for-profit managers receive more of the payoff from responding to these incentives. Thus, contracting to a for-profit provider will be preferred IF the incentives that the firm faces are the correct ones. If the incentives are not correct, however, having more responsive for-profit firms may lead to poor outcomes, and providing the service in house might be preferred.”

http://papers.nber.org/papers/w8802

Further comment: Although Dr. Cutler is referring to health care services, his comments can apply to the narrower topic of medical supplies and pharmaceuticals. “Contracting to a for-profit provider (e.g., middlemen firms) will be preferred IF the incentives… are the correct ones.” But we now have more than ample evidence that the incentives of for-profit firms derive from maximizing profit. This can only result in compromise of the public interest to negotiate the maximum benefit for the patient. So the middleman function should be provided “in house,” that is, by a public negotiator.

In the single payer model of reform, the system becomes the single, monopsonistic purchaser of services and goods (supplies, pharmaceuticals, etc.). The negotiations are made with all manufacturers. By shifting emphasis from an oligopoly of manufacturers to a monopsonistic purchaser, the public single payer negotiator will gain control of the negotiating process. Because the negotiator is representing the public good, negotiations will be in the interests of the patients. That means fair prices, not only for the benefit of patients, but also for the manufacturers since it is in the public interest to assure the financial viability of the producers of the products.

Dr. Cutler’s comments about the European disenchantment with quality as representing the inefficiency view of public sector health care must be viewed from the perspective that European health care budgets are significantly smaller than the amount that is already dedicated to health care in the United States. A system of public funding in this country could avoid patient disenchantment by locking into the budget our current high level of funding.

Since the incentives of the for-profit firms can never provide the motivation to place the interests of patients over the interests of investors, let’s finally quit trying to make that model work. Instead, let’s go ahead and use an in-house negotiator that places the interests of patients above all else, avoiding disenchantment by targeting our abundant resources for health care. Let’s adopt a publicly administered, single payer health care system.

Kip Sullivan responds on health care oligopolies:

If I were the New York Times reporter who wrote this sentence, I would have written it this way: “The problem is two-fold: (1) The buying groups are financed by companies that stand to gain from the buying groups’ decisions, and (2) the buying groups are the natural outgrowth of a health-care system which has forced all players into a race to get big.” The article discusses the problem of oligopoly, but it doesn’t call the reader’s attention to the basic cause of rampant consolidation in the hospital industry.

The most fundamental problem is that the introduction of HMOs into the US health care system by the HMO Act of 1973 eventually made size the highest priority for all participants in the health care system. That was not, of course, the stated goal of HMO proponents. HMO proponents argued that HMOs would save money because they would improve medical practice — ignorant and greedy doctors would be induced or forced to cut out unnecessary services and beef up the provision of preventive services. In fact, HMOs saved money by rationing and extracting large discounts from providers. Both tactics were executed most successfully by the largest HMOs and, eventually, the largest traditional insurers which morphed into managed-care plans. HMO advocates most definitely did not argue that the creation of an HMO industry would confer oligopsony power upon the nation’s dominant health insurers, and that this power would be used to force doctors to cut medical services and to extract discounts from providers. But they might as well have, because that’s what we got.

It didn’t take long for the rest of the health care system to respond in kind. By the mid-1980s, the pace of consolidation had picked up throughout the entire health care industry, and by 1993, when politicians everywhere endorsed managed competition, the pace became just plain frantic. With the possible exception of the federal and state enforcers of anti-trust laws, there is no force capable of stopping this rush to feudalism. But even if anti-trust authorities wake up, it’s unlikely anti-trust suits will ever force a significant deconsolidation of the system. Anti-trust suits are just too slow and too expensive.

My off-the-cuff opinion is that deconsolidation is only possible under a single-payer system, and even then it won’t be easy to accomplish. My on-the-cuff opinion is that it’ll never happen under the current system.

Uwe Reinhardt responds to Kip Sullivan’s comments on health care oligopolies:

One can put a somewhat different spin than Kip’s on the consolidation in the hospital industry.

Like the airline industry, the hospital industry is characterized by high operating leverage–that is, high fixed costs relative to variable costs. When such an industry slides into a state of excess capacity–as it had by the mid 1980s–it would engage in price wars under competition. Until 1990s, the hospitals weathered this condition, because the private insurance industry paid them 130% of average cost, which was enough to finance an average occupancy ratio of 60% or so. (Medicare probably paid full cost calculated at full occupancy).

When the demand side started to force real price competition on the hospitals sector, it initially was driven into price wars that pushed many hospitals into the red. The only way to react to this threat is what the airlines did earlier: consolidate or slice up the market. The airlines did both–and used frequent flyer miles to cement a clientele in place. Hospitals simply aggregated into larger oligopolies.

Under a single payer system you would ultimately need capacity planning. No single payer would sit by idly, covering the full costs of half empty hospitals.

Thus, the choice in the 1980s was never competition vs. regulation, but oligopoly vs. regulation.

Uwe R.