Feature

It’s the market, stupid

There’s little Europe can learn from the US about how to finance and control healthcare costs, argues Kip Sullivan

Alain Enthoven is a Stanford University economist who believes ‘market forces are the only forces known to man’ that can ‘motivate doctors and hospitals to improve care and service while holding down cost’. He characterises all governments as inefficient and unimaginative and private-sector US insurers as efficient, nimble, and creative. He played a significant role in Margaret Thatcher’s decision to augment the role of financial incentives in the NHS.

But even Enthoven cannot bring himself to rate the USA’s laissez-faire health system above the government-financed and more heavily regulated European systems.

He began a 1989 article with the question: ‘What can Europeans learn from Americans about the financing and organisation of medical care?’ His answer, appropriately enough, was ‘not much’. Enthoven justified this underwhelming assessment of the US system with statistics showing that the US spent 12 per cent of its gross domestic product on healthcare compared with 6 to 9 percent in Europe, and had little to show for its high expenditures. Compared with European nations, the US had a high infant mortality rate, an average lifespan, and huge uninsured and under-insured rates.

Today, 14 years later, unbiased observers offer the same assessment. Despite the enormous changes wrought on the US system during the 1990s by the ascendance of a new form of health insurer, the health maintenance organisation (HMO), the US system is still twice as expensive as the average European system (see box). Plus the proportion of Americans who are uninsured has risen over the past decade, to 15 per cent in 2002, and US infant mortality and longevity figures remain inferior.

The spread of HMO cost-control tactics referred to collectively as ‘managed care’ have diminished the quality of care and destroyed medical privacy. There will always be something European doctors can learn from US doctors, and vice versa, about the practice of medicine, but there is very little Europe can learn from the US about how to finance and control healthcare costs. If the US can be of any help at all to Europeans, it is in demonstrating what not to do.

In particular, there are three features of the US system that Europe should not import: the absence of government-imposed price controls; the multiplicity of payers; and the omnipresence of ‘managed care’. The first two account for the USA’s high healthcare costs; the third accounts for the decline in quality of care and privacy.

Laissez-faire ideology

While the US Congress has seen fit to require Medicare (the US programme for elderly and disabled people) and Medicaid (the US programme for the poorest of the poor) to set tight limits on what it will pay doctors, hospitals, and other providers, Congress has never set limits on what providers, drug manufacturers and insurers can charge the non-elderly and the non-poor.

This laissez-faire attitude reflects the dominant insurer and provider ideology that, if left alone, competition in healthcare will guarantee efficiency and reasonable prices. All other developed countries, including all the European nations, have rejected this ideology. Throughout the industrialised world, governments have set limits on what providers and drug companies can charge. In countries that permit private sector insurers to play a role, such as Germany, the premiums they can charge are also strictly regulated. The result is much lower healthcare costs in Europe.

This is especially obvious if we look at differences in the cost of brand-name drugs in the US and European countries (see box). It is also obvious in any comparison of hospital costs (a day in a US hospital costs far more than a day in a European hospital) or physician net incomes (US physician net incomes are as much as three times those of European doctors).

Administrative costs and bureaucracy

The second major cause of the relative inefficiency of the US system is the multiplicity of insurers that pay US providers. Approximately 1,000 private-sector insurers function in the US, alongside several dozen public programmes, of which Medicare and Medicaid are the largest. This multiple-payer system creates excessive administrative costs in two ways.

First, private sector insurers have much higher overheads (expenditure on things other than medical care) than do public insurers in the US and elsewhere. The average US private sector insurer spends 80 per cent of its premium revenue on medical care and 20 per cent on marketing, underwriting, policing doctors, lobbying, and enormous management salaries. In contrast, the US Medicare programme spends 98 per cent of its revenues on medical care and just 2 per cent on administering the program. The Canadian system functions with a 1 per cent overhead.

Second, the multiplicity of payers drives up providers’ administrative costs. US hospitals, for example, spend 25 per cent of their revenue on overhead, while Canadian hospitals, which for most patients need bill only one payer, spend just 10 to 15 per cent on overheads. Countries such as Germany have demonstrated that it is possible to permit multiple insurers to function within a national health insurance system without incurring all the administrative costs of the US system. However, these countries accomplish this by subjecting their insurers to a level of regulation unheard of in the US.

The activities that fall under the rubric ‘managed care’ can be divided into two categories: financial incentives to providers to deny services or to substitute less expensive for more expensive services; and ‘utilisation review’, which means a third party vetoes or alters a physician’s decision. These tactics were pioneered by HMOs and have since been adopted by 95 per cent of all private sector insurers and many state-run Medicaid programs.

The remarkably insular US health policy community (the academics, corporate vice-presidents, politicians and pundits who dominate the US health policy debate) persisted in praising managed care even after what the US media came to call the ‘HMO backlash’ in 1996. That year saw a significant increase in HMO lawsuits, legislation to prohibit early discharges from hospitals and other HMO abuses, HMO horror stories in the media, and much joking at HMOs’ expense in cartoons, TV sit-coms, films and talk shows.

But when insurance premium inflation hit double digits in 2000, even the health policy community began to temper its enthusiasm for managed care. ‘The protagonists of managed care now are in full retreat,’ wrote economist and managed-care advocate James Robinson in an article entitled ‘The End of Managed Care’ in the Journal of the American Medical Association in 2001.

One of the most stinging assessments of managed care was delivered by George Lundberg, a former editor of JAMA who, as recently as 1996, co-authored an article urging US doctors to have patience with managed care. In a 2001 interview with the Los Angeles Times, Lundberg said: ‘Managed care is basically over. People hate it, and it’s no longer controlling costs…[I]f it’s not saving money…why should we have it? But like an unembalmed corpse decomposing, dismantling managed care is going to be very messy and very smelly, and take a while.’

Managed care has failed to contain costs for one simple and obvious reason: the spread of managed care has driven up administrative costs, both for insurers (it costs money to supervise doctors) and providers (arguing with HMO employees about whether a patient needs a particular medical service, drug or device costs money).

These higher administrative costs offset the savings managed care achieved by reducing services. Managed care damages quality of care for an obvious reason: its two tools – financial incentives and utilisation review – are meat axes, not scalpels. They cut out necessary medical care as well as unnecessary care.

In addition to the absence of limits on provider charges and problems associated with multiple unregulated payers practising managed care, the US system appears to suffer a fourth defect that does not afflict European systems – extensive fraud. The US General Accounting Office, a research arm of Congress, estimates fraud could account for up to 10 per cent of US health care spending. Fraud is a problem partly because of the multiplicity of payers (it is easier to bill 20 insurance companies for 50 hours of work in a single day and escape detection than is to bill a single payer and get away with it), and in part because the absence of price and fee controls encourages a culture that celebrates individual economic success and denigrates social solidarity.

If Europeans look to the USA for lessons, it should be for lessons in what not to do. Instead, Americans should be looking to Europeans for new ideas on how to control healthcare inflation. To date, the debate about health policy in the US has been quite parochial; that may change soon. The US system is in such dire straits that even employers and doctors, who for years have joined with insurers to prevent Congress from discussing alternative systems, are beginning to express an interest in the cost-containment methods of other countries.