I've written about healthcare a lot and admire how Milton Packer, MD, has written so economically about a vast issue. It might help all of us in this discussion to remember some basic healthcare economics and market concepts.
I believe I can help people make senses of this if they are willing to take the time to read somewhat long posts. The first two bites in this three-post series will provide some history. The final bite will be a discussion of the economics of health.
Part 1: A bit of history
To fully understand the evolution of healthcare policy, it is important to go back as far as the end of World War II. The historical context coincides with these mid-20th Century events.
Recognize that the structure of the system was that the hospitals were predominantly nonprofit and so there was a certain lack of "business" pressure with respect to performance and the bottom line. In addition, the people with the financial responsibility on boards of directors were the moneyed movers and shakers of the community. They could, and sometimes did, cover operating deficits. Physicians, while having plenty of interest in the hospitals' functioning well, were neither employees nor contractors. They were free agents within the hospital organization.
In some communities, working with the medical staff was like herding cats. It's not that the doctors were evil. It's that they wanted some things the hospitals sometimes couldn't give -- like more technology, for example. The entire structure was akin to the professional autonomy found in universities.
At the same time, the population was growing, the need for a full range of services was being demanded and the federal government was there to help. The passage of the Hill-Burton Act spurred a boom in hospital contraction that lasted from the late 1940s until the mid-1970s. While the main purpose was to build hospitals in communities that didn't have them -- read rural -- like most federal programs, people who played the game well got the money and hospitals sprang up everywhere. Or, existing hospitals got new wings.
Policymakers came to realize, however, that supply created its own demand. If a hospital built the beds, ORs, and x-ray suites and so on, they had to be used to cover the costs and debt service. At the micro-level, the community had to pay for the over-building and cover the costs of the resources. At the macro level, pumping patients through the system to fill beds and finance the growth added up to higher costs for the country.
And guess what came along to help fill them? Medicare and Medicaid. Those programs created another revenue stream for the system. In economic terms, they created demand. Remember, though, that some of that demand wasn't need that was based on clinical judgment and evidence-based medicine. The model for paying doctors by the procedure and service still prevailed in the early days of those huge programs. Although these programs had economic consequences, they also did something valuable for Americans. They took care of sick people who otherwise would have suffered whatever resulted from not getting medical care.
The filled hospitals and clinics and added to the total medical and healthcare costs for the nation. Combine this influx of revenue with the supply creating its own demand, and medical costs skyrocketed. By the way, some researchers noticed that all of these medial resources didn't vastly change what were then considered key indicators of a nation's health -- infant and maternal mortality, life expectancy, and other measures of morbidly and mortality.
Around the mid-1960s, scientific advances and medical technology were having a greater effect on medical care .The first kidney transplant had already occurred in Boston in the 1950s. By 1967, Dr. Christian Barnard stunned the world with the first heart transplant. The first CAT scanner came along in the 1970s, but the people who came up with the idea had developed it in the 1960s. And so it went.
But, for all the good the technology did, it also drove up the costs. And it was around the mid-1960s we began to hear the word "crisis," which we're still hearing today. Some of those people taking about "crisis" were members of Congress. One would think that if they could call it a crisis for 60-plus years, they might have found a way to solve it, but that's another story.
One of the answers Congress had for cutting costs in the 1970s was to control capital expenditures. It passed a series of laws establishing coordinated planning for communities that required states to institute programs to assure that expensive capital expenditures could be justified by community need and not duplicate services. This was called Certificate of Need, or CON, and remains on the books in some states. If a hospital wanted a new CAT scanner, or someone wanted to build a new nursing home, they had to get it approved through a process that justified the expense. The theory was that if need was proven, the utilization would be optimized.
Some hospital administrators understood this was a good thing for the community, the nation, and the system. But as a group, they fought CON. Then they got smart and began to work with their doctors and gamed the system -- except in two hospital towns. Behind the scenes, medical equipment and hospital construction interests (contractors, architects, etc.) loved CON. They had things to build and equipment to sell. Despite the political nature of the local competition for new toys, many felt that the legislation provided for a rational distribution of resources like preventing duplication of services and to some degree held back the growth of healthcare costs, if only a little.
As far back as the late 1970s, the American Public Health Association and others proposed treating the entire healthcare system as a public utility. Healthcare is a public good, the argument went, so regulating it as we did with gas, electric, and water providers would give us a rational model for resources usage and controlling healthcare costs.
Policymakers would never know; the programs were not in place long enough to fully test them because in 1982, something happened to change the landscape drastically once again.
Part 2: So-Called Consumer-Driven Healthcare
The nineteen eighty-two election saw the Republicans and the Reagan administration create the illusion that the entire American economy was classical free market. The rules that applied to food and air travel and other commodities were now said to apply to the healthcare industry. Some of this was sold as "consumer driven" healthcare.
After years of hearing that the healthcare industry's rising costs could be stemmed by dismantling regulations, the Reagan administration had to develop a rationale to convince voters and policymakers that the so-called free market would work more effectively. The way they did so was to create the notion of consumer-driven healthcare.
To some degree, the sociology and the political environment made this possible. Interactions between physicians and patients in the 1940s and 1950s were paternalistic. But after the tumultuous 1960s and early 1970s, aided by the women's movement, patients became consumers and wanted to be empowered. And, to be fair about it, many folks were better educated and could ask decent questions about their medical issues.
Then, the "get healthy" movement grew. The insurance firms saw another way to shift the burden of cost to consumers. If you weren't in shape, exercising, and eating healthy, any disease problem was the patient's fault. Never mind that it was unfair to millions who became ill through no fault of their own. But, it was an easier sell to tell people they were responsible for their own healthcare decisions -- and for paying for gym memberships -- than it was to deal with lower profits from paying hospital and doctor bills. Such an approach by the insurance industry, however, led to the practice known as medical underwriting, which permitted insurers to either deny coverage or payment for people with pre-existing conditions or unhealthy lifestyles.
By slicing and dicing population, insurance companies could control their risks in such a way that it maximized profits at the cost of human lives -- literally. In fact, medical underwriting represented a shift from some of the earliest insurance programs, such as the original Blue Cross program first established in Texas. Blue Cross used a system known as community rating, which lumped the entire population into the risk pool. This allowed the younger and predominantly healthier population cohorts to pay the same premium as the older and more at-risk population segments. The Affordable Care Act contained the individual mandate for the very purpose of pushing the industry back into the community rating; and, to sabotage the industry's ability to medically underwrite its risk pool at the cost of human lives.
The deregulation also killed another program before it could really help rationalize the system. The comprehensive health planning legislation of the mid-1970s recognized that emergency medical and trauma services needed to be coordinated. The levels of trauma care were established and systems of routing patients to different levels of hospitals had begun. But the deregulation also crippled that initiative. That is not to say our emergency services system collapsed completely. However, it has been built without a rational coordination at the federal level. The remnants of such an irrational program, however, can still be seen today with the establishment of these freestanding emergency clinics that purport to offer the same level of emergency care as those emergency and trauma centers based in full-service hospitals. Along with those claims, by the way, they also undercut the hospitals' ability to maintain supportive revenue streams.
The floodgates that opened the competitive free-for-all had consequences: overbuilding meant over-supply and those costs had to be recouped. So, the list prices of the services skyrocketed and some of the insurers and HMOs put their collective feet down. So did Medicare and, consequently Medicaid, which took much of its guidance from Medicare regulations. One could argue, by the way, that Medicare was the first to try reining in costs based on the necessity for certain services. Private insurance followed.
Either way, what matters is that the revenue that hospitals and others lost had to come from somewhere. And it came from those insurance plans that could hike premiums as they saw fit or from those without insurance or who chose to pay. The two "uninsured" groups were the very rich, who in their own way are self-insured; and the poor and working poor who couldn't afford the premiums or whose employers didn't have health coverage. For the former, the massive bills didn't matter; for the latter, the burden was crushing.
The cost of healthcare in the aggregate for the nation soared.
Meanwhile, hospital administrators had sold the doctors down the river a long time ago. Certificate of Need programs gave them the excuse they needed to not buy capital equipment, especially in non-competitive markets. Of course, that led to friction with physicians, who -- especially in competitive markets -- were no angels either. In those instances, medical staff played hospitals off against one another. Hospital administrators also jumped on the marketing bandwagon. "Branding" became popular, so basic maternity services got an interior decorator and the name "Women's Center." Fitness services led hospitals to build or invest in health clubs, in some cases, with disastrous revenue consequences.
The lack for regulation opened the door for some other changes in the industry. First, skilled nursing facilities, nursing homes, and long-term care facilities, boosted by Medicare and Medicaid revenues, burgeoned. For-profit companies dominated the industry, lured by promises of an aging population and Medicare's focus on controlling hospital costs. Add to that, the rise of for-profit HMOs as part of the for-profit insurance industry and the focus became the bottom-line, not patient care. Then, to escape the scrutiny of hospital regulations and the controls on revenue, outpatient facilities blossomed, including those free-standing surgery centers, urgent care centers ("doc-in-the-box"), diagnostic imaging centers, GI labs, and treatment centers, some physician-owned.
While the national mandate for Certificate of Need disappeared, some states retained their capital regulation programs; but, for the most part, Reaganomics opened the door to massive building booms and equipment acquisitions that continue to this day. Contractors, big equipment manufacturers (GE, Picker, Siemens), medical device makers, and suppliers had a field day. That continues to this day.
And, the cost of healthcare in the aggregate for the nation soared some more.
Part 3: The Economics of Health
But healthcare is not a "free market" commodity. The basic free market, supply and demand rules, don't apply. Here's why:
1. There is little price elasticity, which means no matter how many doctors there are, the price won't change much because (a) patients/consumers don't have the knowledge of the prices a free market requires, (b) patients/consumers can't or won't price shop because they don't choose their physician that way even if they could; and, (c) because insurance companies set the price through negotiation with the doctors, hospitals, and other providers. And, don't forget, these are products that most people neither want to buy nor understand fully.
2. There's no free entry into the market. Physicians are licensed by the state and must graduate from an accredited school of medicine or osteopathy and not everyone can get into a school of medicine or osteopathy, or pass licensure exams. You just can't hang out your shingle and pretend to play doctor. And, to use the libertarian argument that the market action and lawsuits would work against bad outcomes is illusory. First, the resources for litigation are not equal, making that argument moot. But more important, recently, conservatives managed to pass so-called tort reform, making litigation nearly useless. Caps on awards for a provider's negligence or malpractice made the penalty meaningless. The incentive to be careful was reduced.
3. There is no free choice among doctors and hospitals, a condition that a truly free market requires. That's because insurance plans provide high disincentives for patients going "out of network." Or your private HMO won't allow a certain test or x-ray -- a decision made by a bureaucrat in private industry, not a qualified medical professional.
4. Buyers and seller don't have equal knowledge of the product or service -- unless the patient is another clinician, the consumer can't choose by quality, which means "competition" is based on non-rational factors while the marketplace is supposed to be rational.
5. Remember in classical economic theory, an excess of supply over demand lowers prices. Not so in healthcare. As we explained, supply creates its own demand because the incentives are to use the excess resources to spread overhead over the patient base. This raises prices, which all insurers pass on as premiums.
And, the cost of healthcare in the aggregate for the nation soared some more.
Few hospital administrators stood up to the public policy makers to tell them that healthcare wasn't just another commodity. The few hospital administrators who saw the flaws in the deregulation, out-numbered by the sycophants who dared not upset the powerful in Washington, cowered in the corner. A few hospital administrators really allied with physicians and their medical staff to create a real team. Silenced by cowardice, the provider trade groups didn't resist. For the suppliers, there is no incentive to be rational. In fact, their jobs are to sell, sell, sell and because they are a far more powerful lobby than the professional organizations, they win.
The economic model hasn't changed much since the 1980s. But some other things have, both in the industry and broader society. In broader society, we've experienced the entire corporatization of the U.S. and its state governments. As a result, over time there has been a colossal shift in the role of government from serving the people to serving corporations and those in power. This is a full pendulum swing from the ideals of the New Deal that pulled our country out of a major depression.
The corporatization has, of course, infected the healthcare industry from top to bottom. Perhaps the minimal harms such corporatization has brought is to bring minor efficiencies to the system it has added capitalization to the system to bring in the new technology that burgeoned over the last 40 years. And that new technology is the second big shift for the healthcare industry. Without going into detail, technology is saving lives and improving the quality of lives. But its overall effect on healthcare costs has been to raise them.
However, talking about costs and prices in the healthcare industry is also a bit illusory. In some respects, cost and prices in the healthcare industry are much like prices on a used car lot. The fact is that there is no truly good way to do cost analysis, although perhaps computer technology is bringing us closer to that goal. It's on the price side of the equation that discussion steps off into Wonderland. All the prices for every itemized healthcare service are negotiated. There is no set price.
Note the date of a quote the 2014 New York Times obituary for Dr. Rashi Fein, one of the most iconic healthcare economists of the last two centuries: "'A new language is infecting the culture of American medicine,' Dr. Rashi Fein, a health economist who died in Boston Sept. 8, wrote in the New England Journal of Medicine in 1982. 'It is the language of the marketplace, of the tradesman, and of the cost accountant. It is a language that depersonalizes both patients and physicians and describes medical care as just another commodity. It is a language that is dangerous.'"
Here is a simple fact: We are not going to control the cost or prices of healthcare in the U.S. until we realize that it is not a commodity. And, frankly, had the political climate been different, that's exactly how we would have dealt with the healthcare "crisis." And, I might add that we've been calling the situation in healthcare a crisis for almost 60 years. Crises don't last that long. This is the lack of political will and corporatization of the country.
The most rational approaches left are universal healthcare -- call it Medicare for All or call it Single Payer. Over time, the patient and revenue flow will balance out the system. The complementary approach to universal healthcare is re-instating regional health planning. We broke the "if it ain't broke, don't fix it" rule in the 1980s. It is not looking backward to become rational again.
Corporatized America will scream "socialism" as a code word for all that is wrong with an economic system. And corporatist America will say that a single-payer system will be a government takeover of healthcare. Don't be fooled. Medicare has saved lives since 1966 and it's far from a government takeover. Most of the Medicare and Medicaid regulations were put in place to counter abuses of the system by the corporatists. Keep in mind the joke about Ann Rand and two friends walk into a bar. In their fully libertarian world, they drank tainted alcohol and died.
How we handle healthcare policy in the future will tell us what our values are as Americans. Do we begin to address the guns versus better issues with the military -- industrial complex and continued warring? Do we live in a country where we recognize the value of community and that working together can make us greater than the sum of our parts? Or, will we continue to weaken our country by denying healthcare through an economic model that rejects the notion that we should be a healthy nation?
George Schwarz spent 25 years in the health care industry after a 1969 M.A. in hospital administration from the University of Iowa. In 1996, he became a reporter specializing in medical, health and investigative journalism.