Feature

US health policy is pie in the sky

After years of proclaiming that the market was the answer to all their – and our – health care dilemmas, Americans are now beginning to understand that competition may create more problems than it solves. Geof Rayner investigates

In 1996 the New York Times ran a feature on health care in Europe. The European countries, it announced, were finding state provision unaffordable and were turning towards the same kind of market-oriented cost control measures used by managed care companies in the US. The newspaper prophesied that the US – long the odd-one-out in healthcare policy terms – had now become the policy exemplar for Europe. In other words, the market ruled supreme.

Such a conclusion must have been comforting for the American policy elite, unused to thinking that the US didn’t know best, and no doubt irritated that Europeans seemed to finding solutions to problems of equity and cost that had eluded them for years. At the start of the 1990s health care purchases in the US rose to 13 per cent of GDP, from only 5 per cent in the early 1950s. Over 15 per cent of the population couldn’t afford healthcare insurance. The last attempt to introduce reform from above – Bill Clinton’s vapid health care reforms – had failed and if the federal government wasn’t able to introduce economies into America’s trillion dollar healthcare system then the market would, and could, do the job.

Indeed, there was already evidence that marketplace medicine was working. In Massachusetts, with the highest costs in the US, insurance bills actually fell in 1996. Instead of doctors and hospitals running the show, insurance companies were coming to the fore. Having to compete for the employer’s health care dollar (employers pay around $600 to $700 a month towards an employee’s family policy) they were introducing more affordable healthcare, halting the drift towards super-specialist provision and by degrees introducing the previously unthinkable: rationing.

As Alain Enthoven, the chief guru of marketplace medicine – both in the US and in Britain – once put it, sectors such as the airline industry, telecommunications, or express postal delivery ‘uniformly led to lower prices and cost reductions’ when opened up by de-regulation. Why not health care?

Enthoven’s prime example was California. In that state the country’s second largest healthcare purchasing group, the giant employee benefits group called CALpers was forcing down costs by effective group purchasing. Alongside health maintenance organisations like Kaiser-Permanente (to which Enthoven was a paid advisor) it was predicted that a more market-oriented system was emerging, one in which power was being transferred from the medical profession to the competitive marketplace.

The logic was appealing. In every year since the mid-1960s health care had been the fastest rising component of inflation and had become the biggest burden on American companies, generating employment costs which far exceeded corporate profitability.

Managed competition/managed care thus became the mantra of the policy elite. Everywhere one turned ‘health’ economists were singing the praises of markets and pointing to evidence of a turning tide. No longer was US health care subject to the dictats of medical monopolists, they said: health care was being turned into a consumer product like any other. And like other consumer products it was now subject to the creative destruction of the marketplace.

But recent evidence suggests that if this was true for a while it is not so now. In the coming year, Massachusetts health care costs are slated to rise by 8-12 per cent. California’s CALpers has already agreed average cost increases of 9.7 per cent in January 2000. It is forecast that this only the beginning of substantial rises in health care costs.

Why isn’t the market driving down costs as the economists predicted? There are a host of reasons. Chiefly, the insurance companies who now control a substantial swathe of US health care are losing money. Over the last few years they artificially suppressed premiums to win customers but that tactic is no longer sustainable and having suffered large financial losses they are now forced to play catch-up. A second reason is countervailing power. American consumer ideology says that the consumer should get satisfaction. But managed care isn’t giving it.

A recent survey funded by the WK Kellogg Foundation found that of 1,500 randomly chosen respondents one in three rated the US health care system as ‘terminally ill’. 85 per cent of respondents blamed the private insurance companies and 79 per cent felt health care should be a ‘right’. The high level of dissatisfaction did not vary by race or income. Result: enormous pressure on Congress to establish stronger ‘patient’s rights’ legislation.

The health care market is failing in other respects. By more carefully defining the costs of transactions and reducing ‘cost shifting’ (subsidy of unprofitable patients) it makes the health care system even more inequitable than before. Despite an economic boom that has brought the lowest unemployment rate for 20 years, the number of people without insurance has increased.

So where next? Marketplace theory – or ‘consumer choice’ as Enthoven calls it – is bankrupt. The Wall Street Journal admitted in August: ‘Not long ago, some optimistic policy makers predicted that managed care would be the antidote to runaway health care costs. No more.’ And the newspaper predicts that, when the next economic downturn hits, many employers will dump their rising health care coverage, further increasing the ranks of the uninsured. Unless the industry figured out how to re-engineer health care to improve quality and efficiency, ‘it could even be replaced by a government system’.

Although that last suggestion is unlikely – and is probably only intended to make the insurance companies feel queasy – there is clear evidence that marketplace tide has turned. Perhaps this would be a good time to send European health policy advisers across the Atlantic to offer some sound advice?