The New York Times
October 27, 2001
“The state Health Services Commission has been working since July on a Legislature-mandated task of finding ways to expand the Oregon Health Plan to cover more of the working poor.”
“In ranking benefits, from hospital care to non-emergency ambulance transport, the commission in effect chose which services will make the cut when the Legislature draws the budgetary line next year.”
Dr. John Santa, director of the Office for Oregon Health Policy and Research:
“It comes down to an old issue. Is it better for everybody to have something than for some to have a lot and others to have nothing?”
Comment: It does come down to an old issue. Public programs for the medically indigent will always carry the “welfare” stigma, and, as a result, will be chronically underfunded. Oregon is famous (infamous?) for its unique approach of ranking the priority of various medical services, covering the most essential services, but using a guillotine on the remaining once the funds are depleted. As other states are struggling with the budgetary problems inherent in expansion of eligibility for Medicaid and S-CHIP services, Oregon has decided to guillotine more of the health care corpus as its solution. The services that will be excluded are not ineffective, wasteful services, but they are beneficial medical services that will no longer be accessible to this vulnerable population merely because of lack of affordability.
Once again, we already have the resources to provide comprehensive care to everyone, but we lack an effective method of allocating those resources as we continue to cling to the fragmented system of expensive, wasteful health plans, underfunded public programs, and expansion of the ranks of the uninsured. It seems that everywhere we turn, the need for a publicly administered, universal health insurance program cries out. Why aren’t we responding?
Prof. Uwe Reinhardt responds to Prof. James Robinson and his comments which included, “… the California experiment with physician organization as the heart of the health care system will have come to an end.”
Prof. Uwe Reinhardt:
I have read James’ paper. Although he is an economist by training, he seems to have adopted more the style of a journalist for this piece. Viewed through the cold prism of an economist, the California story seems relatively simple and totally unsurprising.
If memory serves me correctly, per-capita health spending, insurance premiums and charges for health services in California tended to be way above the national average during the 1970s and 1980s (as they were in Massachusetts). I recall a paper penned at that time by Steve Schroeder in which he marveled that physicians in San Francisco had little trouble earning a good living in spite of the fact that the MD-population ratio there had reached 600, more than triple the national average. There was also excess capacity in the hospital sector at that time, if memory serves me well. In fact, the supply side drove the entire California health system, without little resistance on the demand side.
Managed care was designed by its architects (Enthoven and associates) to take down this excess capacity through the power of private market forces, rather than through regulation. This had to mean (a) that some of the existing capacity (including physicians) had to be driven out of the California market altogether and (b) that downward pressure on the prices for all health services would be the chief instruments through which that excess capacity would be driven out. For physicians, this meant that even those left standing after the purge would have permanently lower incomes than they once had enjoyed.
Can anyone really be surprised that such a campaign would disillusion and frustrate a supply side that had hitherto reigned supreme, in relative fiscal luxury? Could reasonably people have expected any other outcome? Could widespread bankruptcy during the transition from excess capacity to “right-sized” California health system be avoided?
End of story, as it is perceived through the economist’s prism.
As an addendum to this story, let me mention that I find myself truly puzzled by the fiscal problems of the large multi-specialty group medical practices and IPAs in California. Specifically, I wonder what do they mean by “bankruptcy?” What does the income statement and balance sheet of a bankrupt medical group look like?
If physicians in such groups are paid something resembling a salary which that is then is booked by the group as an expense on the income statement (which means as a charge against the group’s networth), then of course such groups can easily slide into losses and, eventually, into bankruptcy. Here one envisages physicians tenaciously insisting on their traditional incomes, rather than accepting the lower incomes dictated by market forces, thus driving expenses above revenues and, eventually, the group’s liabilities above the realizable value of its assets (the economic definition of insolvency, which then leads to the legal status of bankruptcy).
But if physicians, like the general partners in any other partnership, were paid out of the residual left after all of the group’s expenses for items other than physician time have been met, then “bankruptcy” would have to mean that there was no annual residual to pay physicians anything at all–that revenues did not even cover non-physician expenses. Is that, then, what happened in California? I rather doubt it. My hunch is that physicians expensed their take-home pay and charged it against the group’s networth, which then led to “bankruptcy.”.
Now, remember: The whole idea of managed care was to depress the prices of health services (and with it the incomes of health professionals) enough to drive a sufficient number of them out of the California market, thus reducing that market’s excess capacity. This is how markets work everywhere else. Thus the “bankruptcies” we now see should have been fully expected.
To my mind, the central lesson from the California experience is that the idea of integrated health-care delivery systems that are paid by full capitation and, therefore, must assume the full financial risk for the health care of the insured will cause enormous fiscal stress on the supply side of the market if that capitation is set by competitive market forces in a market beset by excess capacity.
It is so, because in such a market the capitation rates will be driven below the full cost of the kind of care that patients expect, even if that care is efficiently produced. The market approach in this context could work only if all participants on the excess-ridden supply side of the market had the stomach cheerfully to eat the harsh medicine dished out by private market forces, including bankruptcy and being driven out of the market altogether. In the early 1990s, the majority of Americans either supported that idea or acquiesced in it. They chanted “Let the government get off our backs!” Evidently, and not surprisingly, once faced with the brutal working of the private market, this country’s health-care providers do not have the stomach to take that harsh medicine nor, in the end, does the public and the regulators who represent that public.
Finally, I agree with James that, in the short run, California will try to get out of the current turmoil in the health care market by going the PPO route, which means shoving a much larger fraction of the cost of health care on to the shoulders of patients themselves and, thus, moving ever more clearly towards an income-based health system. In that system, tightly controlled HMOs are likely to have a comeback, perhaps even multi-specialty medical groups specializing in care for the lower-income strata. It may be argued that such a system is un-American, that this is not in keeping with our cultural norms. But our national defense in these scary times is income-based as well, and everyone seems to find that just ducky. (Not surprisingly, economists find the volunteer army “efficient.”)
Best,
UER