By Arnold Relman
New York Review of Books, July 27, 2013

The US health care system urgently needs fixing. It is much too expensive and inefficient, and leaves too many people with no care or inadequate care. In March 2010, the recently elected Obama administration barely managed to pass the Affordable Care Act (ACA), a huge and complicated collection of legislative initiatives designed to correct the system’s problems.1 The statute is 2,700 pages long, and so far there are about 20,000 pages of regulations.

Most Democrats generally approve of the ACA as an important achievement in health care legislation, which moves the US closer to the kind of system it will ultimately need. Its central provision is a mandate for nearly all either to have insurance or else pay a fine. Despite its deficiencies and complexities, and however much it disappoints those hoping for more fundamental reform, the ACA’s supporters call it a good start that can be amended later as necessary.

However, more than a few liberals think the ACA was fatally compromised by deals the president made with the private insurance, hospital, and pharmaceutical industries to get their support, particularly the sacrifice of a “public option”—insurance the government would sell if private companies refused or their plans were seen as excessively expensive. They believe it will ultimately fail because it does not basically change our dysfunctional system. It expands and improves private insurance coverage, but provides no effective controls of rising costs and no significant change in the way medical care is delivered. Many of the critics think we need major reform that replaces private insurance and employment-based coverage with a publicly funded single-payer system.

Before the ACA was enacted, the president’s health care proposals were bitterly opposed by Republicans who said they violated two conservative principles: first, the familiar Reagan view that government involvement usually is the problem, not the solution; and second, an implied but rarely spoken belief that medical care is basically a special kind of business, and should conform to business practices. Republicans believe that the ACA flouts these principles by depending heavily on government regulation and interfering with free-market forces.

Republican opposition hardened even more after the legislation became law, culminating in a constitutional challenge before the Supreme Court. On June 28, 2012, the Court sustained by a 5–4 vote the contested major provision in the ACA that mandated insurance coverage. But by a 7–2 vote, the Court struck down the provision in the law that gave Congress the power to withhold federal Medicaid support from states refusing to expand their Medicaid program, which provides medical care for poor people. This decision made it financially feasible for states to opt out of the ACA’s provision requiring that the coverage of low-income patients be expanded. As of this writing, seven of them have done so. The Urban Institute estimates that this will deny insurance to nearly six million very poor people.

Democratic victories in the elections of 2012 retained the narrow Democratic majority in the Senate and virtually ensured the legal survival of the ACA, at least until the next presidential election. Nevertheless, the Republican minority in the Senate and the Republican-controlled House continue their unyielding opposition through legislative tactics designed to delay or prevent the ACA from being implemented, funded, or even revised. The House has voted many times to defund parts of the law, such as the provisions to expand community clinics and educate the public about the ACA, and in mid-May voted to repeal the entire act for the third time. But like the two other votes for repeal, this latest Republican initiative will be dead on arrival in the Senate.

Regardless of the Republican opposition, the long-term survival of the ACA will remain uncertain if it fails to control costs. National expenditures for health care grew by 3.9 percent each year from 2009 to 2011 and are estimated to have grown by 4.3 percent in 2012. In earlier years, increases were more than twice as high. The president’s economic advisers attribute most of this slowdown in costs to changes in the health care market produced by the ACA, with less owing to the recession. But a recent study by the Kaiser Family Foundation gave just the opposite explanation: the major cause of the slower increase in costs was the recession, while theACA had a much smaller effect.

The Congressional Budget Office estimates that when the expansion of insurance begins under the ACA in 2014, about 15 million more people will obtain it, with further additions in subsequent years. Per capita expenditures in both the private and public sectors will again grow substantially, and more costs will be shifted from government and employers to individuals.

Much of the increased expenditures will result from the overuse of high-cost tests and procedures. These technologies are available in all advanced countries, but are used far more often in the US (without generally better outcomes), partly because they are profitable for providers. The rise in expenditures does not augur well for the future of the ACA. Furthermore, it is uncertain whether there will be enough primary care physicians to care for all the newly insured. Even now, the preference of physicians for specialty practice makes it difficult to find primary care practitioners in many areas.

The law could unravel and ultimately collapse of its own weight if it becomes too difficult to administer and too expensive. Already there have been many delays and missed deadlines for issuing regulations and implementing various provisions of the law.

On July 2, the administration, in response to complaints from big business, announced a one-year postponement in the law’s mandate that large employers offer health insurance by 2014 or pay a fine. It is hard to imagine that this will not have ripple effects, and perhaps make it less likely that uninsured individuals will comply with the mandate to buy health insurance by 2014 or pay a fine—already a hard sell. In fact, many states are choosing not to establish their own insurance “exchanges.” These are the online marketplaces at which, under the ACA, uninsured people and small businesses can shop for private insurance at group rates. As of this writing, it appears that the federal government will have to create, and be ready to operate, exchanges in more than thirty states.

In apparent response to insurance industry lobbying, the government has weakened its power to regulate the exchanges by allowing any plan meeting minimum standards to qualify for the exchanges it will operate. The government will not require competitive bidding or standardization of benefits that would help consumers choose a plan. Estimates of federal costs to set up the exchanges have risen, and despite assurances by the president and other officials, it is uncertain that they will be available by October, as required by the law. Nor is it evident that the needed federal funds will be appropriated, in view of the opposition of the Republican-controlled House.

Up to three quarters of uninsured people do not know about health insurance opportunities under the ACA, and Health an
d Human Services Secretary Kathleen Sebelius has been soliciting private funding to help spread the word. However, if many uninsured healthy young people do not choose to buy insurance, and instead choose to pay a fine, private insurers might be forced to raise the premiums in the exchanges to unacceptable levels, because those remaining in the insured pools would on average be sicker and more expensive to care for.

By the end of Obama’s presidency the law will have existed for over six years, and may be much better understood and more accepted than now. Nevertheless, the current sequestration of funds by Congress and pressures to reduce health expenditures may require the administration’s health policies to change. The president’s budget message to Congress on April 10 proposed to cut federal spending on health care by $401 billion over ten years. This is only 3.5 percent of the projected increase of $14 trillion in total federal health costs over that time, but it suggests that he may ultimately agree to even larger reductions in his health care program to meet demands for fiscal austerity. Of course, much will depend on future political events.

Among the many recent publications on health care and how to fix it, two are notable for the power of their criticisms of the current health care system. The first is a book by David Goldhill, a successful business executive. The other is a cover story in Time magazine by reporter Steven Brill, to which Time devoted an unprecedented twenty-seven pages and nearly 25,000 words.

As his title—Catastrophic Care: How American Health Care Killed My Father—and How We Can Fix It—suggests, Goldhill believes that his father, an eighty-three-year-old practicing psychiatrist, was “killed” by errors in hospital care. Consumed by grief, and impressed by the strong published evidence that preventable errors cause far too many hospital deaths, he decided to take a hard look at what he calls the “complex mess” that is the current US health care system, and at the ACA, which he believes contributes to the “mess.”

Few of his criticisms are new; most of them are found in earlier writings by experts. But rarely has the irrationality of the system been so convincingly demonstrated, including the opaque and highly inflated prices of medical care. Prices for different medical treatments and procedures vary widely and unaccountably, as Goldhill observes. Without rational pricing, Goldhill says, consumers can’t evaluate their health care options, and ordinary market forces don’t work. Consequently, health care economics is almost totally dominated by the providers of care, mainly hospitals and physicians. This creates uncontrollable costs, and health providers have little incentive to focus on quality.

The most telling part of Goldhill’s critique is his explanation of how insurance distorts the system. In his words:

Health insurance isn’t real insurance…it’s the payment mechanism for health care…. Basically [it consists of] shifting money around from consumers and taxpayers to providers…at an almost inconceivable level of complexity and expense.

Insurance relieves patients of most of the responsibility for payment of major charges, such as for operations, making them less concerned about costs. This lessens their incentive to weigh the price and quality of what they buy, as consumers do in other markets. Together with a payment system that reimburses doctors for the fees they charge for each item of service, and pays hospitals largely in the same way, insurance is a major cause of rising health costs.

Goldhill’s criticism applies generally to all medical insurance, including Medicare, but private insurance is the worst offender (a point this corporate CEO overlooks). As I have explained elsewhere,2 the business overhead and administrative costs (including disgracefully high salaries for senior executives) for private insurance are much higher than those for public insurance, thus increasing the price of private premiums. Government actuaries estimate that private insurance increased health care costs in 2011 by about $150 billion. Adding to this, doctors and hospitals incur considerable expenses (probably more than $20 billion) in billing and collecting from the wide diversity of private insurance plans.

In two appendices at the very end of his book, Goldhill questions whether the ACA’s insurance exchanges will work as planned since they will probably reduce the number of competing insurers, increase premium costs, and encourage individuals to stay uninsured until they become ill. He also doubts the success of the “accountable care organizations” (ACOs) that are proposed by the ACA. These are groups of physicians affiliated with one or more hospitals that provide care for a group of patients who have chosen to be treated by a particular ACO. An ACO can accept a single payment for a complete episode of care—for example, treatment for cancer—rather than multiple itemized fees for each doctor’s services. Goldhill says that the ACA is much more likely to increase than decrease health care costs since increased insurance coverage inevitably raises expenditures. Once people are insured they and their doctors tend to use far more medical services. And none of the experimental measures in the ACA intended to control rising costs, such as ACOs and new payment methods, has yet been proven to work nationwide.

In the last three chapters of his book, Goldhill proposes to fix the system, but this is where he goes wrong. He relies on old conservative notions about the health care market that have never been demonstrated to work, and are based on a fundamental misunderstanding of medical care. He advocates gradual transition to a system in which patients would, according to their means, be given government vouchers in the form of “health savings accounts,” enabling them to act as consumers do in ordinary markets, shopping for the outpatient care they want at prices they find attractive. (Accounts would belong to the patient and could be used before taxation to pay for medical care or saved, with interest, and expended after taxation for any other purpose.) This idea is called “consumer-directed health care” (CDHC) and has been championed by many business leaders and conservative health policy experts. But CDHC is a delusion; seriously ill patients cannot be expected to know what treatment they need, even if they are well informed or are physicians themselves.

Goldhill’s recommendations for fixing the health care system differ from earlier CDHC ideas in that he would abolish all the usual types of public and private insurance plans in favor of a government-funded plan for catastrophic high-deductible insurance that would set prices for hospital services and thus control high-end hospital costs. Like other CDHC plans, his would use health savings accounts to discourage expenditures for outpatient care. However, CDHC with health savings accounts is unfair to patients of limited means because it shifts costs and risks to them, restrains their use of medical services they may generally need, and reduces the financial burden on employers.3

Brill’s story in Time, “Bitter Pill: Why Medical Bills
Are Killing Us,” is an investigative report on the astonishingly high prices charged by hospitals for medical care and for all the supplies and equipment they use. Brill gives detailed descriptions of the enormous bills faced by particular patients after their care at specific hospitals, and the devastating effects of these bills on their lives.

He shows that hospital prices usually exceed their costs by extravagant margins, with markups often nearing 1,000 percent. For example, one hospital charged $1.50 for a single Tylenol pill, one hundred of which could be purchased through Amazon for $1.49. Another hospital charged $151.61 for a blood count that Medicare says costs the hospital $11.02, and billed a patient nearly $8,000 for a special cardiac stress test that Medicare values at $554. With charges like that, even so-called not-for-profit hospitals have revenues large enough to pay their executives’ outsized salaries and greatly expand their facilities, while showing a respectable net income.

The greatest abuses involve patients with private insurance or with no insurance. Charges to those covered by Medicare or Medicaid are more modest because these large public payers can force hospitals to give substantial discounts based on the hospital’s actual costs, whereas private insurers usually get smaller discounts. They simply pass their costs along to patients in the form of higher premiums, deductibles, or copayments. But even Medicare and Medicaid are limited in controlling their costs by the lobbying and political influence of the hospitals.

Recent public disclosures by the government of the prices Medicare pays for services at three thousand hospitals around the country reveal great disparities among these institutions in their charges for similar services, thus supporting Brill’s description of unjustified and irrational hospital pricing. Growing resistance to rising inpatient prices has caused hospitals to shift more of their services to outpatient care, which is much less regulated. Outpatient tests and procedures can be billed at higher rates than in the hospital.

To solve the problems he has described, Brill recommends a number of initiatives such as tightening antitrust laws to prevent hospitals from monopolizing a market, making it possible for other health care organizations to compete, taxing the net income of all hospitals—whether legally classified as “for profit” or “not-for-profit”—and requiring them to make their pricing methods more transparent and more related to actual costs. He also recommends legislation imposing stronger price controls on imaging procedures, such as CT scans, and reform of medical tort laws to reduce the unnecessary services ordered by physicians who are concerned about malpractice claims.

Unfortunately, these measures only address the margins of the cost problem. They have the same limitation that he and Goldhill attribute to the ACA; they do not address the underlying causes of the health cost explosion, namely a private insurance system and a fragmented, income-seeking medical care delivery system that is largely paid by fee-for-service. Brill concludes that medical prices are much too high, but he never tells us why.

An article in Politico on March 14 suggests that Brill may be having second thoughts about how to fix the system. He is quoted at a March 13 panel discussion in Washington, D.C., as saying that he is increasingly siding with those who advocate a single-payer plan as the best solution for the health system’s cost problem. In aNew York Times Op-Ed piece on February 17, shortly after his book appeared, Goldhill offered a different opinion about single-payer, saying it would never be able to control costs in the US because of lobbying pressures on legislators. Nevertheless, in many quarters single-payer reform is gaining advocates who seem not to share his skepticism about the ability of government to help solve health care’s problems or his confidence that CDHC can.

The ACA will not provide affordable access to care for all citizens. Even after next year, loopholes in the ACA’s coverage will result in many millions who are uninsured. Among them will be very poor citizens not covered by Medicaid in some states, native Americans, and undocumented immigrants, as well as an unknown number of uninsured people who will choose to pay a fine rather than buy private insurance. True, the ACA extends and helps to pay for private insurance and eliminates many of its abuses. But health costs will continue to rise for the reasons I mentioned, and private (as well as public) insurance will continue to get more expensive and shift an ever-increasing burden to insured individuals in the form of copayments and deductibles, even as benefits shrink.

What can be done about this? The political gridlock in Washington, the financial interests of the health insurance industry, and the concerns of the physicians, clinical facilities, and businesses that are threatened by reform all make any significant change in the status quo unlikely—at least anytime soon. Probably nothing will happen until the public and the medical profession become sufficiently aroused by the growing failure of the system to provide the affordable care we need. At that point, the possibility of a single-payer system will be seriously considered because it is arguably the simplest and most logical solution—the best, and probably the only, way to ensure a universal right to affordable access to care.

The question will become: What kind of single-payer system will work best? Medicare is an example of a single-payer system that benefits those over age sixty-five and others with some types of disability (for example, end-stage kidney disease). It pays for care largely on a fee-for-service basis, and care is delivered by a mélange of independent physicians and facilities that compete for patients and income. Although Medicare forces large discounts on prices, it cannot control the volume or, with few exceptions, the choice of services. As a result, fee-for-service payments in such a system are an incentive to maximize services that can be billed separately, and Medicare’s costs have risen almost as rapidly as those in the private sector. Despite the cost-containing initiatives of the ACA, Medicare’s costs on a per capita basis are projected by the Congressional Budget Office to nearly double over the next decade, with unsustainable consequences for the federal budget.

“Medicare for all” is a policy favored by many advocates of single-payer reform. By replacing all private insurance plans, it would save a lot of money, but it would not solve most of Medicare’s problems. It would not address the rising costs that are generated by the various income-seeking medical care businesses; nor would it reduce the huge costs of the unnecessary and duplicated services delivered by the present fragmented and disorganized system. Neither would it prevent the fraudulent abuse of the billing system by physicians and health facilities that currently adds at least 5 percent to the total cost of health care. To avoid all these problems, “Medicare for all” would have to go beyond simply reforming the insurance system. It would have to change the method by which the single payer reimburses doctors and clinical facilities, and it would also have to change the way medical care is delivered.

Most experts agree that cost containment will require replacement of fee-for-service payment with some method that encourages quality of care rather than an increasing volume of services. The ACA provides for experiments with “pay for performance” to reward quality, and private insurers are already exploring this approach. But quality in medical c
are is hard to define, and most of the guidelines suggested so far have been controversial. Moreover, such an approach invites providers to avoid high-risk patients. “Risk adjustment,” in which payment is varied according to the severity and complexity of a given condition, is equally controversial. I doubt that initiatives based on any of these new payment ideas will prove practical enough to be widely adopted.

“Bundled” or “global” payment for a total episode of care (for example, complete treatment of a patient with pneumonia, a heart attack, or a fractured hip) has also been proposed as a substitute for fee-for-service, but for practical reasons, a system of global payment cannot generally be applied. Many medical services cannot be neatly divided into discrete episodes; neither can the contributions of all the doctors involved in the case be easily assigned and weighed. The only kind of bundled payment that is likely to be workable is payment for all the medical care needed by a patient. But such a system would require an organization that could receive the bundled payment and distribute it appropriately to the physicians delivering the care. In other words, bundled payment requires an accountable care organization (ACO).

The only type of ACO that has been proven to satisfy patients and physicians is multispecialty group practice. According to the American Medical Group Association, there are now well over 430 such group practices and their number is increasing rapidly as more physicians seek group employment. Multispecialty groups now employ about 130,000 full-time-equivalent physicians (which I estimate to mean about 200,000 individuals) who provide the medical care for about one third of all patients. Since there are some 878,000 working doctors in the US, more than one out of every four or five doctors is practicing in such groups. Some 70 percent of medical groups of all types are owned by, or affiliated with, hospitals, and in almost all, medical staff are paid according to bills collected, often with a small added base salary.

Data from the Medical Group Management Association indicate that average staff earnings in groups are fully competitive with earnings in solo or small partnership practice, particularly if the generous fringe benefits that groups usually offer are also considered (for example, office expenses, malpractice insurance, paid vacation, pension plans). And judging from their low turnover rate, physicians who choose employment in successful, well-managed groups are usually satisfied with their job.

However, only a few medical groups currently avoid the inflationary incentives of fee-for-service by contracting with insurance plans that pay them on a per capita basis for comprehensive care of some or all of their patients; and even fewer pay their medical staff by salary. Kaiser Permanente is an example of both. But as pressures increase to contain costs by avoiding fee-for-service, this kind of group practice will probably become much more common.

In my book A Second Opinion, I have described in detail how a single-payer system sponsored by the federal government would function when coupled with a reorganized medical care system based on independent multispecialty group practices with salaried physicians. Replacement of all public and private insurance and elimination of itemized bills with a public tax-funded system that simply paid medical groups per capita for comprehensive care would avoid much of the expense and many of the other problems with the current system. The enormous savings could ensure adequate compensation for all the facilities and physicians needed for universal care.

The loss of jobs in the eliminated private insurance industry would probably be more than compensated by increased employment in a greatly expanded public-payer system, and by the new jobs created by the emerging business opportunities created when employers no longer need to pay the health costs of their employees. Government would be able to contain the rise in total health expenditures by its power to set prices and determine the level of taxation required to fund the system, but it need not micromanage medical care. Medical decisions should remain in the hands of physicians and their patients, where they belong.

Most important, this revolution in our health care system would make universal access to good care affordable. It is a revolution that seems inevitable, even though it is not yet on the political horizon.

1 A detailed summary of the law’s many provisions and an excellent discussion of their significance can be found in Landmark: The Inside Story of America’s New Health Care Law and What It Means for Us All (PublicAffairs, 2010), written by the staff of The Washington Post. ↩

2 See my article “In Dire Health,” The American Prospect, January–February 2012. ↩

3 This argument is developed fully in my book A Second Opinion: Rescuing America’s Health Care—a Plan for Universal Coverage Serving Patients Over Profit(Century Foundation/Public Affairs, 2007), chapter 4. ↩

http://www.nybooks.com/articles/archives/2013/aug/15/obamacare-how-it-should-be-fixed/