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Health Care - Detailed Background

Why health care reform is needed

From a moral point of view, it is unreasonable for an advanced democracy such as the United States to have 15% of its population (about 47 million Americans) uninsured and many more in chronic fear of losing health insurance. Adding insult to injury, the number of uninsured is expected to increase by 20% over the next years (Cutler). Pursuit of happiness is a hollow phrase for those who are sick and without affordable medical care.

From an economic point of view, it is irrational for the United States to devote significant portions of its health care funds for administrative and other non-care purposes. The current pace of health care cost increases is also unsustainable. The percent of our Gross Domestic Product allocated to health care has increased from 5.2% in 1960, to 7.2% in 1970, 9.1% in 1980, 12.3% in 1990, 13.8% in 2000, and 16% in 2005; and it is expected to reach 20% in the next years (Polsky). Moreover, the increasing health care costs have more adversely affected middle- than high-income Americans because their wages have increased more slowly and the costs account for a larger proportion of their budget.

As recently published in the New England Journal of Medicine, “…those who shoulder the financial burden of maintaining the current system—primarily, working families—are not fully aware of that burden's full weight” (Polsky). Our health care system might be justified if outcome was better than in other advanced countries, but we spend at least twice as much yet have the lowest life-expectancy (77.5 vs. 78.5-80.2 years, respectively). Despite the highest health care spending per capita, the World Health Organization ranked the United States’ system at #37 (France is ranked #1).

Funding reform

The Nobel Prize winning economist, Paul Krugman, explained this paradox: “We've stumbled into a system in which large sums of money are spent not on providing health care, but on denying it” (Krugman). Significant portions of the United States’ extra spending on health care are the consequences of administrative costs related to our multi-payer system (about $300 billion per year) and high drug costs related to inadequate bargaining power with pharmaceutical companies (about $100 billion per year). Reform to a single-payer health insurance system would allow recouping of most of these wasted funds and allocating them to covering the ‘uninsured’ and improving quality without increasing taxes on low- and middle-income Americans.

The tax exclusion for employer-sponsored health insurance, the U.S. Government's second highest health insurance expense (after Medicare), should also be modified because it represents an unfair regressive tax policy. In large part, this is because high-income individuals who have higher tax rates end up getting a higher tax break from the exclusion; in fact, three-quarters of the lost revenue is from those in the top half of the income distribution. In a single-payer system, the tax exclusion could be made more equitably progressive by capping it at the Medicare for all premium level and eliminating it for those in high tax brackets. In other words, people in low- and middle-income brackets would be able to continue the tax exclusion for their Medicare for all government-sponsored health insurance but those in high-income brackets would not receive the tax exclusion.

Even with the current multi-payer mainly private health insurance system, or with a multi-payer hybrid compromise, the tax exclusion should be equilibrated by capping it at current average premium levels ($4,700 for individuals, $12,800 for families) and eliminating it for those in high tax brackets (e.g., for families with income exceeding $125,000). Such reform could raise about $50 billion per year in revenue (Gruber).

Finally, about $43 billion per year currently goes to supporting essential health care services for the uninsured. These funds would be allocated to subsidizing a universal coverage mandate for low income individuals and families (Blumberg).

Why is the American health care system so costly?

Private insurance companies do not make money by paying for providing care but by denying care through risk selection (not selling insurance to high risk people or charging them high premiums) and avoiding payment (denial management) (Krugman). These costs account for a significant portion of American health care spending. These costs would be eliminated in a single-payer Medicare for all system because everyone would be insured and all covered-procedures would be reimbursed. Therefore, administrative costs would be dramatically lower.

Providing evidence for this prediction, it is notable that administrative costs currently account for only 2% of Medicare costs, contrasting with 15% for private insurance companies—accounting for about $84 billion per year in extra administrative costs (McKinsey Global Estimate). If one adds physician and hospital administrative costs related to the multi-payer structure, about $300 billion per year extra is spent, accounting for one-third of the difference between the United States' and other developed countries' health care costs. That administrative costs account for 31% of health care spending in the United States versus 17% for Canada (which has a single-payer system) also predicts large cost savings with a single-payer system (Krugman).

The high prevalence of employer-based health insurance in the United States has partially mitigated the problem of risk selection. This is so because to qualify for the tax exclusion, the insurance must be offered to all employees regardless of age and health. However, since health care costs increased from the 1980s on, employer coverage has fallen (e.g., from 65% in 2001 to 59% in 2006); in part, this explains the current unraveling of the system (Krugman).

In the United States, there is also an absence of centralized bargaining with pharmaceutical companies for price reduction, predicted to be accounting for about $100 billion per year extra in health care spending (Krugman). Financial incentives (self referral, absence of performance standards) also contribute to high spending. It is important to note, however, although physician salaries are higher in the United States than in other developed countries, they account for only 2% of extra spending. Another driver of American health care costs is refusal by some private insurance companies to reimburse preventive care because they rarely reap the benefits because people change insurers frequently.

What are some of the other drivers of escalating costs of health care? Medical progress is an important component but how medical progress is integrated into medical care delivery systems is likely more important. Dartmouth University researchers found that common disorganization in delivery of care results in inefficiencies (both overuse and underuse of care), clinical decisions are routinely based on faulty ethical standards (‘informed patient consent' rather than ‘informed patient choice’) leading to undesirable treatments, and clinical scientific evidence is inadequate (often leading to subjective non-evidence-based clinical decisions). Medicare spending on elective surgery can be predicted to decrease by 30% with implementation of ‘informed patient choice’ policies (Dartmouth).

The Dartmouth researchers reported, however, that “…not all health care in America is alike. There are islands of excellence in the sea of high cost mediocrity”. There is a 2.5-fold variation in Medicare spending across the country (even after adjusting for pricing, age, race, and baseline health). But remarkably, there is no evidence that more spending translates to better care; mortality is actually higher where spending is higher. This is likely due to more medical errors, adverse events, hospital-acquired infections, and diagnostic tests finding clinically unimportant results (sometimes called ‘pseudo-disease’), and especially due to disorganized care delivery systems (Dartmouth).

Research shows that the hospitals and physicians which have figured out how to provide higher quality and cost effective care are structured as organized systems of care (e.g., Mayo Clinic in Minnesota, Geisinger Clinic in Pennsylvania, and Intermountain Healthcare in Utah). In organized systems, there is less inappropriate clinical decision making based on physician opinion (preference-sensitive care) and medical capacity (supply-sensitive care). Dartmouth calculations confirm 30-40% decreases in health care spending in these organized systems (Dartmouth).

Thus, as recommended by the Dartmouth researchers, I believe Congress should take the lead in enacting a multi-year program aimed at organizing delivery of care throughout the United States, requiring ‘informed patient choice’, and increasing funding of clinical comparative outcome research.

Is a single-payer health insurance system (Medicare for all) un-American?

Conservatives and insurance companies have opposed a single-payer health insurance system with three themes.

The first critique is that in a single-payer system, choice would be eliminated or reduced. Millions of dollars have been spent on advertising campaigns to communicate this to the American population. But as recently reported in the New England Journal of Medicine, “Americans have been misled by the rhetoric about choice” (Brett). This is because critics have mixed up the effects of proposed health care reform on choice of insurance carrier versus choice of health care provider. Proposed reforms would only affect choice of primary health insurance, not choice of health care providers or treatments.

It is true that in a single-payer system, there would be loss of choice for one's primary health insurance carrier because everyone would have Medicare. However, Americans would maintain their right to purchase supplemental health insurance so there would still be insurance carrier choice (for secondary insurance). Moreover, Americans would maintain their right to choose their doctors, hospitals, and other providers. In actuality, choice of providers would increase because all would be ‘participating providers’. The problem of ‘non-participating providers’ would be resolved.

The second often-stated critique is that access to care would be decreased due to rationing. Critics state that government bureaucrats will make clinical decisions rather than doctors. These statements are misleading because rationing of care has nothing to do with who pays for care. We need to figure out how to pay for proven therapies (and not pay for those which do not work) whether we maintain the current multi-payer system or transition to a single-payer health insurance system. In fact, bureaucrats in private insurance companies currently routinely ‘ration care’ by denying unproven tests or therapies. There is no rational reason to believe that government bureaucrats will ration care any worse than private company bureaucrats with clinical decisions affected by profit motives.

How is access to care in other countries with single-payer systems? In France and Germany, access is good. In the United Kingdom and Canada, there is delayed access for elective surgery, but more rapid access for acute care (Krugman). Clearly, we should learn from their experience and ensure access for proven testing and therapies.

The third and more general critique is that “a Canadian-style Medicare-for-all system—is antithetical to American values” (Brett), is un-American, and is ‘socialized medicine’. As reported by Dr. Brett in the New England Journal of Medicine, the ‘American values’ claim has been used to justify “preserving the status quo or making incremental changes” (Brett). I believe the critique is insulting to the conscience and intelligence of Americans; most Americans surely care more about doing what's right morally and economically than about titles. There's nothing un-American about ‘doing good by doing good’.

At most, Medicare for all represents socialized health insurance, not socialized medicine. Among large developed countries with single-payer health insurance systems, only the United Kingdom has socialized medicine (where most doctors are employed by the government). In the United States, socialized medicine is only in effect in military and VA care where doctors are employed by the government. Even among critics, few would eliminate the current Medicare system which represents socialized health insurance, not socialized medicine, for the elderly.

If a single-payer system cannot be gotten to the table, what should be done in the meantime?

If in the short run, improving the current multi-payer health insurance system, is the only reform that can get to the legislative table, the following priorities should be pursued (Krugman, Gruber, Blumberg, Iglehart):

  1. Mandated coverage
    • Everyone should be required to have health insurance. Like car insurance, there should be penalties for abuse.
  2. Subsidies
    • The average premium for health insurance is about $5,000 per year for individuals and $10,000-13,000 per year for families. These premiums are not affordable for those with low to moderate income. Therefore, Medicaid coverage should be extended.
  3. Community rating
    • Insurance companies should be required to cover everyone with equivalent premiums (as currently required in New York and Vermont). With ‘community rating’, everyone is charged an average premium regardless of health. Insurance companies should not be allowed to deny health insurance to anyone.
  4. Public-private competition
    • Public-private competition has potential to decrease health care costs because public carriers may be able to lower administrative, drugs, and delivery costs. However, private carriers’ administrative costs should decrease because they will no longer incur ‘selection’ costs. Thus, private carriers may remain competitive.

A multi-payer health insurance system incorporating mandated coverage, subsidies, and community rating is much like Massachusetts’ program, which has been in effect since 2006. Governor Schwarzenegger has planned a similar program for California. These programs, however, do not have public-private competition. The main political advantage of these improved multi-payer programs is that additional revenue is only needed to cover the uninsured via the extended Medicaid subsidies. The main economic disadvantage is that health care costs remain high because denial management administrative costs, low bargaining power for drug pricing, and low prioritization of preventive care continue.

How should the approximately $100-120 billion per year price tag for the extension of health insurance subsidies be covered? One option is to utilize revenue generated from the expiration of the Bush tax cuts. The expected revenue should suffice to cover the subsidies if not allocated to other expenses. But as recently reported in the New England Journal of Medicine, reducing the tax exclusion for employer-based insurance (capping at the average premium level and elimination for high-income earners) is the “most natural source of financing” (Gruber).

I also support using tax policy to try to reduce obesity by financially incentivizing better diet and life-style.

Malpractice (tort) reform

Tort reform should also be a priority of policy makers regardless of party affiliation and political bias because ‘defensive medicine’ is a “substantial driver” of cost and unnecessary procedures, and because tort reform may attract support for health care overhaul from organized medicine (e.g., American Medical Association) and Republicans (Mello).

There should be caps on noneconomic damage awards. Malpractice cases should be adjudicated by specialized judicial courts or administrative boards, in which decisions would be made by “neutral experts”, and providers would be protected from liability if evidence-based medical standards were met (so called “safe harbor”).

Tort reform has been hampered by the fact that medical malpractice law has traditionally been state controlled. Congress can take partial control of malpractice law by conditioning allocation of federal health care funds to acceptance of federally directed tort reform.

Anti-fraud reform

Health care fraud is estimated to account for $60-72 billion per year (3-4% of health care budget). Medicaid estimates $18.6 billion per year in improper payments (10.5%). In response, in 2002, Congress enacted the Improper Payments Information Act, requiring the executive branch to report estimates of fraud and abuse annually and planned actions to address noted problems. Nevertheless, anti-fraud programs have been grossly inadequately funded (e.g., in 2008, only $1.13 billion for Medicare and Medicaid—less than 1% of Medicare's budget). Moreover, organized crime has gotten involved in medical care, contributing to fraud (Iglehart). These programs should receive additional funding to ensure they can adequately investigate and prosecute health care fraud.

Physician ethical behavior

Gifts by pharmaceutical and device companies to doctors can adversely affect clinical decision making by inserting financial motivations. This can also be a driver of increasing health care costs. Massachusetts and Vermont have enacted new regulations to address the ethical and financial issue of gifts. Vermont's law, signed by Republican governor Jim Douglas in June 2009 goes further than the 2008 Massachusetts law which was the strictest in the country until then (Steinbrook).

The Vermont law bans gifts to doctors, other health care personnel, and institutions, from pharmaceutical companies with few exceptions. For the exceptions, the law requires disclosure of the marketed product, the name of doctor with contact information and affiliation, and dollar amount of gift. The State Attorney General summarizes the disclosures annually. Vermont had a pharmaceutical marketing disclosure law since 2002 but it was watered down by exclusion of requirement for disclosure of “trade secrets” claimed by pharmaceutical companies.

With the new Vermont law, gifts are classified into three categories: (1) banned, (2) allowed but must be disclosed, (3) allowed and disclosure not required. Most gifts to doctors are banned. Exceptions include samples for free distribution, short term loans for trial periods, and journal articles. Payments that are allowed with disclosure include speaking, consulting, and research (the exceptions to disclosure requirement are royalties and licensing fees, rebates and discounts, and free samples). Disclosure of payments for clinical trial work can be delayed for up to 2 years. Gifts to institutions are allowed but must be disclosed, including honoraria with specific contracts detailing content (violations can get up to $10,000 penalty per violation).

The Physician Payments Sunshine Act, pending in Congress would require disclosure of some gifts to doctors but not to institutions. Congress should preempt the states’ laws by adopting strict ethical standards akin to Vermont's new gift disclosure law.


  • Blumberg LJ et al. The individual mandate—an affordable and fair approach to achieving universal coverage. NEJM 2009; 361:6-7.
  • Brett AS. “American values”—a smoke screen in the debate on health care reform. NEJM 2009;361:440-441.
  • Cutler DM. The next wave of corporate medicine—how we all might benefit. NEJM 2009; 361:549-551.
  • A Dartmouth Atlas white paper. An agenda for change. Improving quality and curbing health care spending: opportunities for the Congress and the Obama Administration. The Dartmouth Institute for Health Policy and Clinical Practice, Dec 2008.
  • Gruber J. A win-win approach to financing health care reform. NEJM 2009;361:4-5.
  • Iglehart JK. Finding money for health care reform—rooting out waste, fraud, and abuse. NEJM 2009;361:229-231.
  • Krugman. Conscious of a liberal.
  • Mello MM et al. The role of medical liability reform in federal health care reform. NEJM 2009;361:1-3.
  • Polsky D and Grande D. The burden of health care costs for working families—implications for reform. NEJM 2009; 361;437-439.
  • Steinbrook R. A higher bar—Vermont's new law on marketing prescribed products. NEJM 2009; 361;8-9.
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