Wednesday, May 5, 2010

Will Health Reform Fall Short - Why Politically Acceptable Reform Is Not Enough

Frederick Gluck was with the McKinsey Corporation management consulting firm for nearly thirty years, serving as its Managing Partner from 1988 to 1994. He has been a regular contributor to the Republican National Committee – not the sort of fellow you would expect to push for a single-payer national health insurance plan.

However, in a letter to President Obama before the passage of the health reform bill, Mr. Gluck urged the President to do just that. He also warned, “If you settle simply for expanded coverage, you will have fallen short and the system will founder of its own weight sooner.” This perspective was undoubtedly influenced by the time Mr. Gluck served as director of Hospital Corporation of America, Inc., an operator of 163 hospitals and 105 surgery centers in 20 states and London, England.

What does Mr. Gluck mean when he says that the new American health care system may “founder of its own weight sooner” rather than later? The issue is cost: the U.S. health care system chews up 17 percent of gross domestic product (GDP) while only covering (before health reform passed) 85 percent of Americans. All the other developed countries in the world spend on average half what the U.S. spends on health care, but get better results.

In fact, the U.S. health care system was never “designed” like the health care systems of our allies around the world, such as Japan or Germany, but just grew piece-meal to serve the needs of various constituencies, with private and public insurance bureaucracies created to administer them. While the health reform legislation will cover more Americans, it will likely do little to contain exploding health care costs.

Conservatives in the U.S. hold vehemently to the notion that government-run programs (like a national insurance system) are inherently inefficient, and our current private, for-profit insurance system is much better at containing costs. International comparisons do not bear this out. For example, in 1994 Taiwan created a health system that uses private doctors and hospitals with a single, government-run national health insurance plan. Administrative costs for Taiwan’s National Health Insurance are two percent, one-tenth as high as the administrative burden in the U.S. system.

What explains the high cost of private health care administration in the U.S.? Part of the explanation comes from the fact that our private, for-profit insurance industry operates with a “medical loss ratio” standard of 80 percent, meaning that payments for actual medical services (“medical losses”) should not exceed 80 percent of premium payments.

The remaining 20 percent is reserved for administrative costs and profit. Any CEO of a for-profit health insurance company whose medical loss ratio strays much above 80 percent is summarily shown the door. According to Gluck, “We now support an enormous, purely administrative insurance and reimbursement infrastructure that segments markets in ways that create an extraordinary range of possible access options for the insured. This is, of course, the diametrical opposite of a system designed to guarantee equal access to all. This infrastructure is very expensive and yet, in the end, has very little effect on the care actually delivered to any patient.”

In comparison, national health spending in Taiwan equals about 6 percent of GDP. With such (relatively) low spending on health care, surely care must be rationed significantly? In fact, the Taiwanese system allows free choice of any hospital, clinic, or doctor in the country. The National Health Insurance in Taiwan is comprehensive, covering just about every form of medical treatment, including physical, mental, dental, and optical care, as well as organ transplants, acupuncture, traditional Chinese medicines, and long-term care. Other factors help control cost in Taiwan’s health system, but average premiums for an entire family in Taiwan are extremely affordable by American standards – only $150 per month.
Why is Mr. Gluck so concerned that a “piecemeal approach” to health insurance reform will fall short? Two other industrialized democracies, Taiwan and Switzerland, implemented national reforms in the early 1990s, at the same time that the Clinton reform collapsed in the U.S. In both cases, the winning political argument was a moral one. Should society guarantee access to health care as a basic human right, or is access to health care a commodity to be bought and sold, a product like a car or computer?
The Swiss and Taiwanese both decided that health care is a basic human right. Perhaps surprisingly, the American public overwhelmingly agrees: when pollsters ask the basic question – “do you think everybody has a right to medical care when they get sick?” – more than 85 percent of Americans answer that access to health care is a basic human right. However, this moral issue, what noted Harvard health care economist William Hsiao refers to as the “first question,” has not been a part of the public debate about health care in America.

With the majority of Americans soon to be covered, the moral argument for comprehensive reform has been diminished significantly. This will make it that much harder to challenge the entrenched political interests (the health insurance industry) that stand to lose from reform that will tackle cost control head-on.

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