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The Ghost of Health Care FutureAuthor(s): Richard D. LammSource: Inquiry, Vol. 31, No. 4 (Winter 1994/95), pp. 365-367Published by: Excellus Health Plan, Inc.Stable URL: http://www.jstor.org/stable/29772494 .

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Opinion

The Ghost of Health Care Future

Health reform in the 1990s is not a single piece of legislation; it is a process. The Clinton health proposal has been defeated, but the

process of reform now will move to the states and to the marketplace. Unlike previous years?1965 and 1974?where the defeat of a

presidential proposal meant the defeat of re?

form, this time the status quo will not reassert itself. It is the economics of health care, not the politics, that now drives reform.

The U.S. health care system is not a sus?

tainable one. No element of a budget can grow

indefinitely, as health care has, at two to two

and-a-half times the rate of inflation. When I entered the political process in 1967, the United States spent 6% of its gross national

product (GNP) on education, 6% on defense, and 6% on health care. In 1994, we spent 6% on education, 4.8% on defense, and 14% on health care. Where health care used to equal what society spent on education, today it

equals what society spends on education plus defense, plus foreign aid, plus food stamps, plus agricultural subsidies. The average Amer? ican spends two-and-a-half times more on

health care than on his total state taxes. Health care in the United States has become an eco?

nomic cancer.

At the same time, my generation of public policymakers has totally failed to constrain these volcanic costs. Neither regulation nor

competition has even dented the upward spiral of health care costs. Most of what we have called "cost containment" has actually been "cost shifting." Health maintenance organiza? tions (HMOs), for instance, may save a group of subscribers money, but the studies show that they do not save the community money. Costs that are saved in one part of the system merely are shifted to another part of the sys

tem. We are spending the unaffordable on a

system that is unsustainable. A key to health care reform in other coun?

tries is to set up institutions with leverage that can bargain with the providers for price and

quality. It may be the government as it is in Canada and Great Britain, or it may be a

purchasers' cooperative such as the "sickness funds" in Germany. The Clinton administra? tion initially opted for a series of alliances

(health insurance purchasing cooperatives) where they intended to aggregate demand from

large numbers of insured, and to bargain price,

efficiency, and quality from the providers. Some 90 business groups, acting privately, have set up alliances to jointly achieve econ?

omies of scale. Clinton's alliances are dead, but the concept lives.

When we look at other health care systems that have lower rates of medical inflation, we

soon understand that many European coun?

tries structure their health insurance systems so that money flows from payers to health

providers only through some sort of "money pipe" which gives buyers significant leverage.

Many U.S. physicians understand this and, therefore, fight any system that allows buyers to aggregate demand. After all, they benefit

handsomely from the present fragmented sys? tem, but they have won a pyrrhic victory. As John Iglehart (1994) warns:

Before physicians reject managed care as too inter?

ventionist, they should consider the probable alter?

natives. In the future, they are likely to face a choice

between centralized government regulatory mecha?

nisms, including global budgets, or individual incen?

tives for cost control that operate in a pluralistic,

privately dominated system. The status quo is not a

viable option.

Inquiry 31: 365-367 (Winter 1994/95). ? 1994 Blue Cross and Blue Shield Association and

Blue Cross and Blue Shield of the Rochester Area.

0046-9580/94/3104-0365$! .25 365

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InquirylVolume 31, Winter 1994/95

If the status quo is unsustainable, what will

the new world of health care look like? Part of that answer depends upon how successful

"managed competition" is in stabilizing, or even reducing, health care costs. Alain En

thoven, the father of managed competition, states that there is every reasonable expecta? tion that under managed competition, health care could be reduced to 9% or 10% of the GNP (Enthoven 1993). This would cause a

major shrinkage in the existing delivery sys? tem. This is clearly possible, but not probable given the dismal failure of all reform efforts to

date.

The only precedent for the consequences of a return to 9% of GNP (as Enthoven hopes) for the health care system is the defense in?

dustry cutbacks currently underway in places like Southern California. A massive economic dislocation among health care providers clearly would follow. It is impossible to quan?

tify, except that it would have significant im?

pact on every provider and cause substantial

hospital closings, physician retirements, and massive reorganization of those remaining. The insurance industry's role in health care

either would be eliminated (under a govern? ment-run system), or dramatically restricted to a dozen or so large insurers who would com?

bine with providers to share risk with capitated payments (managed competition). The exact

impact would depend on whether a restruc?

tured market or regulation achieved the reduc? tion.

Even if current efforts succeed in stabilizing health care spending, this will bring a substan? tial trauma to the existing health care system. To stabilize spending in a system addicted to

10% yearly growth will cause considerable

upheaval and disruption. Diets are never

pleasant?usually they cause pain. I believe

health care reform will be at least as dislocat?

ing to existing health providers as fluoride was

to dentistry. It seems inevitable that the new

world of health care will be dramatically dif?

ferent than the old world of health care.

I have been studying six cities that I believe to be harbingers of this new world: Minneap? olis/St. Paul, Portland (Oregon), Sacramento, Salt Lake City, San Diego and Albuquerque. In these six cities, two or three "purchasing

366

cooperatives" or "integrated systems" con?

trol more than 50% of the market. In some

cities, leverage is achieved by buyers; in other

cities, dominant providers discipline the mar?

ket. Once this leverage is achieved, the long sought-after market in health care emerges. Beware of what you wish for?because an

operating market ruthlessly wrings out surplus capacity and establishes efficiencies in a sys? tem too long without them.

Hospitals come under incredible pressure. It

is possible under new incentive systems that half the hospitals in the United States will

close or consolidate. The United States has 3.8 hospital beds per 1,000 people, while many new systems operate only 1.5 beds per 1,000

people. St. Paul, Minn., had 17 hospitals 15

years ago; today, it has six hospitals run by four integrated systems. I ran a certificate of need program for 12 years, and soon came to

realize that a good hospital administrator could beat my best bureaucrat every time. Govern? ment has a hard time closing anything (i.e.,

military bases, hospitals, commissary facili?

ties), but the market is neither sentimental nor

nostalgic. It utilizes just the number to get the

job done, and when a substantial portion of the local population is covered by systems de?

manding efficiency, quality, and service, much

of the excess is soon wrung out of the system. It seems most likely that the United States

will develop a system of "centers of excel?

lence," where specialty operations are done at

fewer locations, but with much greater effec? tiveness and efficiency. Today, there are 850

such centers in hospitals doing open heart

surgery. Less than half of them?375?do the

requisite number of operations that the federal

government considers necessary to maintain

proficiency (250 operations). More than 100 of these hospitals do less than one open heart

surgery a week. The new health care system will consolidate operations in specialty centers

where prices can be reduced and quality en?

hanced.

Ultimately, specialist physicians will find

their lives irrevocably altered. Fee-for-service medicine utilizes 4 to 4.5 doctors per 1,000

people, while integrated systems often utilize half that number. One of the great advantages of these new organizational forms is that they

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better utilize all physicians. Shrinking re? sources and market pressures have pushed physicians in these cities to form efficient "health teams" that dramatically multiply the effectiveness of each physician. This inevita?

bly creates unneeded physicians and has been

causing many specialists to either move or seek

retraining in the growth sector of primary care.

Soon, there will be few places to move to. The pressure will be particularly acute on

the medical specialist. The United States trains 70% to 80% of its physicians as special? ists, whereas all the empirical evidence from other countries and from large HMOs shows that the new systems need at least 50% of their

physicians to be primary care physicians. Dr. John Wennberg, one of America's most acute health observers, estimates, for example, that the United States has 2.5 times as many neu

rosurgeons, and 2.4 times as many general surgeons as it would need if it staffed at classic

HMO levels (Wennberg et al. 1993). Every study over the last five years has warned that the United States was seriously overtraining specialists and undertraining primary health

providers. Government is likely to reinforce the market

in this area. The Clinton administration al?

ready has identified the Graduate Medical Ed? ucation Program money distributed through Medicare for the training of residents as a lever to require medical schools to produce more

primary care physicians and fewer specialists. I would suggest that an indirect effect of the

aforementioned will be that the United States will stop its current practice of accepting 3,000 foreign medical graduates a year. It makes no sense to take a trained doctor from, for exam?

ple, the Philippines or Pakistan, where they desperately need doctors, and add them to an

already overserved delivery system here in the United States.

If the United States comes anywhere near

achieving the efficiency of these six cities in its entire health care system, there will be no need for 126 medical schools turning out approxi? mately 16,000 physicians a year. Many new studies suggest that we need fewer doctors

altogether. An unneeded medical school is an

Health Care Future

expensive luxury which cannot be tolerated in an efficient system.

The remaining medical schools will be under incredible pressure to dramatically increase the number of primary care physicians they graduate, and to reduce the number of special? ists. Residencies will be much less tied to

teaching hospitals. The future system will require medical

schools to take much more into consideration the community needs for health manpower, and it will require them to match their output to what the public needs.

Conclusion

We can defeat a presidential proposal, but we cannot defeat the laws of economics. We are

projected to spend almost $12 trillion on health care this decade; shortly after the turn of the

century, the bill would be $2 trillion a year. The average family would have health insur? ance costs of $900 per month.

The day of "blank check" medicine is over, and a dramatic restructuring is bound to take

place. This will cause substantial dislocation in the current system, but there is no reason to believe that the end result will be less health

producing for the country. The current system has so many excesses that there is every rea? son to believe that health care reform can bring us better health for fewer dollars. It will be

painful to many now within the system, but it will benefit America.

Gov. Richard D. Lamm Director Center for Public Policy and

Contemporary Issues

University of Denver

References

Enthoven, A. 1993. Managed Competition. Health Affairs (Supplement):24-48.

Iglehart, J. R. 1994. The Struggle Between Managed Care and Fee-For-Service Practice. New England Journal

of Medicine 331(l):63-67. Wennberg, J. E., D. C. Goodman, R. E. Nease, and R. B.

Keller. 1993. Finding Equilibrium in U.S. Physician Supply. Health Affairs (Summer):89-103.

367

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