Can the Promise of U.S. Health Care be Realized?

Dr. David Guzick, M.D., Ph.D.

December 31, 2008

What a year! Free markets, it turns out, do not always lead to perfect markets. But that is not a surprise. Economic theory tells us that free markets require perfect information to result in perfect competition. In the absence of perfect information, appropriate regulation helps. We have learned this past year that the free exercise of Adam Smith’s "invisible hand" in the financial industry, when information is opaque and transactions are unregulated, leads to disaster.

Since the global financial meltdown became evident in September, I have written several newsletters that celebrate the achievements of our faculty and staff at a time of great financial strain. Our hospital beds, research labs and classrooms remain full. Opportunities to improve outcomes while saving money have been highlighted, and we will continue to do so.

As this extraordinary year draws to a close, we must acknowledge that the national and state financial crises of the past few months will no doubt impact our day-to-day work at the medical center. We must also recognize that we are about to inaugurate a President who has redefined us nationally and internationally. Possible changes in the big picture of health care practice and research in the United States may powerfully influence our medical school and medical center. My November 21 newsletter was devoted to the research component of the big picture. I argued that extramural NIH research should be a logical recipient of a portion of the Obama stimulus package. In this newsletter, I will consider the issue of health care delivery and cost. There are no easy answers.

In a recent television interview with President-elect Obama, he was asked how he would set priorities among the goals he championed during the campaign: i.e., strengthening America overseas, ending the Iraq war, meeting America’s energy needs, creating a health care system that works, improving our schools, and others. He bypassed the question of prioritizing these goals and answered that his highest priority was to ensure stabilization of the financial markets and to stimulate the economy broadly.

Understandable. Since the election, unemployment rates have risen, foreclosures are at historic levels, and the U.S. automobile industry is teetering on the edge of demise. Add to that the recent hostilities in Gaza, and there will be much on our new President’s plate. Will health care reform see the light of the "first hundred days"?

The case for intervention is well known, as the performance of our health system as a whole is far from optimal relative to the resources expended. At its best, health care in the U.S. is the finest in the world. Access is uneven, however; indeed, the U.S. is alone among developed nations in not having a universal health care system. There are the 45 million people in the U.S. who are uninsured—either through public or commercial programs—many of whom are children.

As shown by the work of Drs. John Wennberg, Elliott Fisher and their colleagues at the Dartmouth Atlas for Health Care, there are tremendous variations in the volume and quality of health care delivered to different populations, variations that cannot be explained on the basis of illness, patient preferences or the dictates of evidence-based medicine. Moreover, the U.S. health care system is by far the most expensive in the world. Whether measured by expenditures per capita or percent of GDP spent on health care, there is not a close second. Yet, whether measured by various outcomes (infant mortality, life expectancy, etc) or measures of quality, access and equity, we are near the bottom when compared with other developed nations.

Let’s look at these last points in a little more detail. Shown below is a graph developed by Princeton economist Uwe Reinhardt. GDP per capita in 2006 is shown on the horizontal axis, and 2006 health spending per capita is shown on the vertical axis. The data points in the graph represent two dozen developed countries that are members of the Organization for Economic Cooperation and Development (OECD). Data are expressed in Purchasing Parity Dollars (PPP$), which adjust for cross-national differences in the purchasing power of national currencies. One can think of PPP$s as dollars that buy roughly the same basket of goods and services in different countries.

Source: Uwe Reinhardt

The graph shows that over a wide variation in health spending per capita in different countries within the O.E.C.D, there exists a fairly tight, linear fit of the data between health spending per capita and GDP per capita. Based on this statistical analysis, and accepting the notion that countries with greater GDP per capita should reasonably show proportionately more health spending per capita, one would have predicted that U.S. health spending per capita in 2006 was $4,819 in PPP$. But the U.S. is shown to be an outlier, with actual spending of $6,714 per capita. Put differently, we spend $1,895 (or 39%) per capita more than would be expected based on the data from other developed countries.

Despite the magnitude of our spending on health care, our health outcomes as a nation are poor. Some of these results can perhaps be attributed to our being more of a "melting pot" than other developed countries that are more homogeneous, but the data are sobering nonetheless. Although gains in medical research, public health and social services have reduced U.S. infant mortality dramatically since 1960, we still have the worst infant mortality rates among the 26 high-income countries of the OECD ("Preventing infant mortality," HHS fact sheet, US. DHHS, April 18, 2001.) Moreover, there is tremendous variation in infant mortality, with the highest rates among African Americans and in certain geographic regions. Among high-income OECD countries, only Denmark ranks lower in disability-adjusted life expectancy. (The World health Report, Geneva, WHO, 2000.)

It also appears that we are not getting our money’s worth in health system performance. Comparative international data have recently been reported: (Karen Davis et al., "Mirror, Mirror on the Wall: An International Update on the Comparative Performance of American Health Care"):

Mirror, Mirror ES1

These findings from The Commonwealth Fund include data from surveys of patients in six nations, as well as information from primary care physicians about their medical practices and views of their countries' health systems. As shown in the table, compared with five other nations—Australia, Canada, Germany, New Zealand, the United Kingdom—the U.S. health care system ranks last or next-to-last on five dimensions of a high performance health system: quality, access, efficiency, equity and health lives.

In short, we are paying more for our health care and getting less. We can only conclude that fundamental change is needed. Simply taking the current system, and adding some sort of publicly funded insurance for a significant segment of the 45 million people who are uninsured, does not address the structural flaws in the system.

With that as background, let’s consider the Obama proposal. Let me say up front that, while there is reason to be skeptical about specific features of this plan, we must all be hopeful—even optimistic—that fresh, on-the-ground analysis by President-elect Obama and his new team after January 20 will lead us out of our current economic morass generally and will also lead to adjustments in the strategies regarding health care reform.

The health care plan put forward by Obama and his team during the campaign included the following elements:

Expanding eligibility for existing public programs, including both Medicaid and the State Children's Health Insurance Program (SCHIP);
Creating a National Health Insurance Exchange to serve as a federal regulator of private insurance plans that would compete alongside a new National Health Plan (similar to Medicare);
Providing income-related subsidies for those without employer-sponsored health insurance while mandating that children have coverage; and
Creating a employer mandate that medium and large employers provide coverage or pay a tax, while extending tax credits to small businesses and creating a government reinsurance program to cover businesses' catastrophic health costs. Some small businesses would be exempt, and others would be subsidized.

Certainly, the actual proposals emanating from the new administration after January 20th may be different from these campaign proposals. Moreover, the analysis of proposals based on campaign documents is compromised by a lack of detail. That said, independent research groups (The Lewin Group, Health Systems Innovations Network) suggest that that the Obama plan would cover roughly half of the 45 million uninsured through an expansion of public coverage; rely on uncertain methods of cost-savings; and require significant increases in federal expenditures. Since the plan greatly increases the federal regulation of private insurance without addressing the core economic incentives that drive health care spending, some analysts have raised questions about its fiscal sustainability (J. Antos et al., Health Affairs 2008; 28:w462-w471). Most of the anticipated savings come not from changes in the delivery system but in the promulgation of extant initiatives such as health information technology and disease management. The effectiveness of such initiatives assumes the success of behavioral change. Mark Pauly, PhD, a Penn health economist, has called such savings "if only" savings—i.e., they can be achieved "if only" certain behaviors were adopted, such as consumers’ willingness to accept changes in diet and exercise, physicians' willingness to adopt health IT, etc. Pauly contends that there are few known methods to cause the "if only" behaviors to occur, and to occur quickly enough on a large enough scale to matter. (M. Pauly Health Affairs 2008; 27:w482-w491)

A recent report from PriceWaterhouseCoopers estimates that the Obama health plan would increase health insurance to 95% of Americans and would cost the federal government about $75 billion during the first year (and $130 billion by 2018). Campaign literature suggests that cost of the program would in large part be financed by allowing tax cuts adopted in 2001 and 2003 for families making over $250,000 to expire. The Congressional Budget Office (CBO) already assumes in its projections that these tax cuts will end after 2010, however, so their expiration will not generate new revenues to satisfy congressional budget rules. Thus, if net savings from new programs such as those in prevention, disease management, and electronic medical records are not fully realized, then the Obama plan would need substantial additional revenues for its implementation.

OK. Enough with the skepticism. These are unique times, the kind that can cultivate the seeds of fundamental change. Earlier this month, President-elect Obama, who was formally announcing Tom Daschle, the Senate majority leader, as his Secretary of Health, said: "The time to solve this problem is now. It’s not something that we can sort of put off because we’re in an emergency. This is part of the emergency." Does this mean that health care will be part of the first-hundred-day agenda after all? Mr. Daschle stated that the new administration’s priorities in health care will be "expanding insurance coverage, as well as reducing cost and improving quality." Is it possible that the current combination of circumstances—the need for stimulus in an ailing economy, a new president with the best and brightest around him, the potential for a variety of initiatives in IT, public health and health education, individual wellness and prevention, an improved understanding about comparative effectiveness through research, etc.—might collectively allow us to walk on the waters of expanded coverage while reducing cost and improving quality?

Here is my (personal, not "official") take: Ultimately, even in this time of seemingly unlimited amounts of new federal dollars being directed to banks, insurance companies and auto makers, there is some budget constraint nationally on health care spending, which must be allocated. If this were a nationalized health system, resource allocation of the total budget would be by central planning and rationing. If this were a market-driven system, price as determined by supply and demand forces would play the principal role in allocation. Under our current, quasi-market system of health care charges and insurance coverage, however, prices facing consumers are often zero or near-zero, leading to artificially high demand. Moreover, unlike the case of a perfect market, suppliers can create their own demand. This economic environment leads to a condition of excess capacity relative to need (as opposed to demand). It follows that, given some level of national spending on health care (which may be $75 billion more next year than this), there is the opportunity nationally to provide excellent health care for all those who need it, so long as we’re smart about the re-allocation of existing resources.

The opportunity for the "savings" identified in the Obama plan is embedded in such a re-allocation. In order to achieve this goal, I agree with the argument put forward by the Dartmouth Atlas group, who state that the most important first step is to make sure that we do not increase capacity significantly at a national level, as this will only create further demand. While this is a controversial first step, it must be accepted if we are to bring into alignment our national health spending and outcomes. (Of course, a capacity constraint nationally still means that local health care segments within a region should expand or contract appropriately in response to local needs.) Once we agree to work within some national capacity constraint, the next steps are to identify the components of the health care system where there is the greatest opportunity to produce efficiencies, and to develop strategies that actualize them. Some of these strategies may be those proposed during the Obama campaign, but others may appear across time if the new Administration brings visibility and focus to the issues of our national health care delivery system. There are true opportunities, such as reducing unwarranted variation in health care utilization, supporting health promotion and wellness programs known to reduce sick days and disability, reducing coverage of medical "treatments" that have no evidence of efficacy, bringing balance to the margins of health insurance companies and hospitals, effecting meaningful tort reform, repealing the ban against Medicare negotiating reduced drug prices, rationalizing nursing home and end-of-life care, and supporting a federal science policy that creates the scientific basis for cost-effective care and fosters research on comparative effectiveness, to name a few.

No doubt, 2009 promises to be a dynamic year, including the potential for fundamental change in our health care delivery system.

With my very best wishes for the year ahead,

Meliora,

David S. Guzick, MD, PhD
Dean, School of Medicine and Dentistry
University of Rochester

Dean's Newsletter

Posted May 28, 2009:
A Fond Farewell to the University of Rochester

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