The Economist cover story, June 25
...
The American health-care system, which gobbles up about 16% of the
country’s economic output, is by far the most expensive in the world
(see chart 1). The Congressional Budget Office (CBO) estimates that on
current trends spending on Medicare and Medicaid, the government
schemes for the old and the poor, will rise from 4% of GDP in 2007 to
12% in 2050. The prospect of long-term fiscal disaster is the main
reason why efforts to reform health care are gaining momentum in
Washington, DC. As Peter Orszag, the director of Barack Obama’s Office
of Management and Budget, puts it, “that ‘long term’ keeps getting
closer and closer.”
The system has its defenders. They point out that countries should
expect to spend more on health care as people age. Americans are
wealthy enough to choose extra health care over other things. Their
free-spending approach calls forth the invention and speedy adoption of
valuable new drugs, devices and procedures, whereas Europe’s stodgy and
stingy (not to mention socialist) health-care systems deny coverage and
ration care, to the detriment of their people’s health.
A poll carried out for The Economist
by YouGov highlights Americans’ beliefs about the state of their
system. Although 68% of them rate the care they receive as “excellent”
or “good”, 52% are dissatisfied with the quality in the country as a
whole. Only 25% think the system works pretty well and requires only
minor changes; 40% think fundamental change is needed and 29% think it
should be completely rebuilt.
The doubters have a better case than the defenders. Granted, medical
inventions are readily embraced by American doctors and patients. In
specific instances—technology to save babies born prematurely and
statin drugs to reduce cholesterol, to take two—the benefits of
spending greatly outweigh the costs. But
if
the system in general were providing value for money, America’s vast
expenditure would at least be reflected in a healthier population than
in more frugal countries. Alas, it is not. Comparisons with other rich
countries and within the United States show that America’s health-care
system is not only growing at an unsustainable pace, but also provides
questionable value for money and dubious medical care. Three troubling
symptoms stand out: uneven quality of care, inadequate coverage and
soaring costs.
Start with quality. Evidence is mounting that spending more does not
necessarily buy better health. On the contrary, it appears that many
Americans are getting mixed or even downright dreadful health care. In
a recent study economists at the OECD found that America does indeed do
well on some measures, such as breast-cancer survival rates and
cervical-cancer screening, compared with other rich countries. However,
it does worse in other areas. American infant mortality was 6.7 per
1,000 births in 2007, against an OECD average (excluding Mexico and
Turkey) of 4.0. The death rate after haemorrhagic strokes was 25.5% in
American hospitals but only 19.8% in OECD countries as a group.
...The Dartmouth Atlas project has scrutinised variations in
health outcomes and spending involving Medicare. It has found wide
differences in costs across the country—less than $5000 per person in
Salem, Oregon, in 2006; a bit more than $8000 in San Francisco, in line
with the national average; more than $16,000, and rising fast, in
Miami—but no connection between higher spending and better outcomes. In
fact, the evidence points in the other direction: outcomes tend to be
better where costs are lower. Mr Orszag points to the Dartmouth work to argue that up to 30% of America’s health-care spending is sheer waste.
The second symptom is coverage.
Uniquely among rich countries,
America’s system of health insurance is not universal. Around 49m
people have no health insurance. On current trends, within a decade 60m
will be without cover. Studies have shown that not all these people are
indigent: a quarter or more can afford insurance, but choose not to buy
it. They know they are unlikely to be left to die in the streets. With
the truly poor, the free-riders turn up at emergency rooms. This is
hugely inefficient, because pricey late interventions and operations
could very often have been avoided with a much smaller investment in
preventive care. Insured people and taxpayers are forced to
cross-subsidise such “uncompensated” and wasteful treatments to the
tune of tens of billions of dollars per year.
Other rich countries cover almost all their citizens in one of two
ways. Some, such as Britain, Canada and Sweden, have “single payer”
systems, in which taxes support a public service. Others, notably the
Netherlands and Switzerland, oblige individuals to buy insurance.
France has a mixed public-private system.
After decades of failed attempts at reform, a consensus appears to be
emerging in America around the principles needed for universal
coverage. One likely change means a restructuring of America’s failed
health-insurance markets.
Firms
are today allowed to pick the safest patients and reject the sickest.
In future they will have to take all comers. Because this imposes
unfair burdens on firms that attract lots of older or sicker people,
reform is likely to include government-funded mechanisms for risk
pooling or reinsurance. The Netherlands, in particular, uses such an approach.
American health insurers, having long opposed this idea, have performed
a startling U-turn in recent weeks. America’s Health Insurance Plans,
their chief lobbying group, now says it is willing to accept such
heavy-handed reforms—if they are accompanied by a requirement that all
Americans purchase coverage. This may seem a cynical ploy to expand
their business, but some compulsion is needed to get around the
selection problem. Any legislation is likely to include subsidies to
help the poorest pay for cover. If done properly, this will in time
move America towards the Swiss and Dutch models of universal private
insurance. These are not perfect, to be sure. Regina Herzlinger of
Harvard Business School observes that the Dutch reforms have led to
rapid consolidation of insurers and hospitals, fuelling resented price
increases. She favours the decentralised Swiss model, which preserves
individual choice and competition. Others note that Swiss health-care
costs are high by European standards. But they are a third less, as a
share of GDP, than America’s, and the country’s excellent health
outcomes should be the envy of American reformers. Our poll suggests
that an individual mandate would be unpopular, with only 21% in favour
and 53% opposed. Respondents did favour having the option to buy from
the government, by 56% to 23%.
Such reforms would expand coverage, but could exacerbate the third
symptom, cost, as the experience of Massachusetts, a trailblazing state
that has already implemented a plan for universal coverage, suggests.
The state faces possible bankruptcy unless it finds a way to rein in
costs. Indeed, tackling inflation in American health care remains the
most important and difficult part of the treatment. According to
our poll, cost is a tender nerve: 61% thought the high cost of care and
insurance was a bigger problem than the number of uninsured, against
31% who believed the reverse. Only 21% would be willing to support a
reform plan if they had to pay more in insurance or tax; 62% would not.
Some common diagnoses are wide of the mark. One is price gouging by
drug companies. In fact, pills account for barely a tenth of
health-care spending in America and similarly small shares elsewhere.
But aren’t costs lower in Europe because of price controls? Europe does
indeed spend less on new branded drugs, but also uses fewer generic
drugs and pays much more for them. And Switzerland actually has
higher drug prices than America (as does Canada). Greedy drugmakers are
not the main cause of America’s runaway costs.
Nor are
baby-boomers, though they are often blamed for health-care inflation
because there are a lot of them and they are getting old. Ageing will
clearly push up costs in time (see our special report
in this issue), but it is not the main culprit yet. The CBO estimates
that ageing accounts for only a quarter of the health-care inflation to
come in the next few decades, and the share in other rich countries is
similar.
Doctors’ generous pay is another popular culprit. But doctors in several European countries are well paid too.
The OECD estimates that general practitioners in America earn 3.7 times
the average wage. Their British counterparts earn 4.2 times their
national average. American specialists earn 5.6 times the average wage,
against 7.6 times for their Dutch colleagues. Yet health-care costs in
Britain and the Netherlands remain lower than America’s.
The real
problem is not how much American doctors are paid, but how. The system
of medical reimbursement warps incentives for doctors, insurers and
patients that lead Americans to consume more and more medical services.
There is strong evidence that Americans use pills, procedures, scans
and other expensive forms of health care more often than do patients in
other rich countries, and not always to good effect.
America’s insurance system encourages overuse in several ways. One is
the tax break that favours health insurance provided by employers,
which leads to excessively generous coverage and hence
over-consumption. Another is the fact that American health insurers
earn a lot of revenue from administering the health plans provided to
employees by big corporations which, in effect, insure themselves. This
leaves insurers with no incentive to curb costs, because more spending
means fatter management fees.
The incentives facing doctors are even more perverse. Most doctors are
not paid a fixed salary, still less rewarded for better health
outcomes. Integrated American systems such as Kaiser Permanente and the
Mayo Clinic are exceptions to this rule, and Britain’s National Health
Service (NHS) is trying to adopt a similar approach. But
most
doctors and hospitals are paid more if they provide more services,
regardless of the results. Predictably, this leads to far higher rates
of doctors’ visits, specialist referrals, scans and so on. For
instance, the OECD countries have an average of 11 magnetic-resonance
imaging machines per 1m people. America has 25.9. America uses them
more often, too: 91.2 times per 1,000 people per year, compared with
the OECD average of 39.1. Similar tales can be told about other pricey
kit.
This incentive problem even extends to patients. If patients pay
very little out of their own pockets they have little desire to curb
consumption. Though this is a problem in many OECD countries, in
America the proportion of out-of-pocket spending has declined sharply
in the past few decades. And a new report by McKinsey, a firm of
management consultants, identifies a more subtle problem. Having
examined insurance and out-of-pocket spending for several health risks,
it concludes that Americans are generally “over-insured and
under-saved”. It is prudent for individuals to have comprehensive
health insurance against catastrophic health risks such as heart
attacks or cancer. But McKinsey finds that
Americans with private
health insurance often have generous coverage for non-essential and
even medically unjustified care (see chart 3). This encourages over-consumption.
A second big factor pushing up health costs is the lack of
competition among operators of American hospitals. Thanks to a wave of
consolidation in recent years, argues Harvard’s Ms Herzlinger, “most
parts of the United States are dominated by oligopolistic hospital
systems.” George Halvorson, who heads Kaiser Permanente, insists
that “there is an almost total lack of price competition among
providers.” Nimble upstarts and innovators are challenging the
incumbents in some areas. Such efforts range from specialist heart
hospitals, which get better outcomes at more reasonable prices than
local general hospitals, to retail clinics at Wal-Mart stores. Remote
medicine, in the form of technology for tele-care or medical tourism to
Thailand and Costa Rica, also poses a threat. But
medical lobbies
are using political influence and outdated regulations to thwart
competition where they can (for example, through rules preventing a
doctor from treating a patient in another state). To counter this,
reforms could allow federal regulators to overrule state-level
obstacles to entrants such as clinics staffed by inexpensive
nurse-practitioners. More transparency would help too, by empowering
patients to choose hospitals and doctors providing good value and
better results. Electronic medical records would make shopping around
easier.
Another useful way to promote transparency and value would be to
evaluate the cost-effectiveness of new drugs, devices and treatments.
This may be common sense, but it is rarely done in America.
Britain’s National Institute for Health and Clinical Excellence (NICE)
pioneered this approach, and other European countries have followed it.
Andrew Dillon, the agency’s chief executive, accepts that “the NICE
model is not transportable in precise form” but he still insists that
“one can dissect and apply what is relevant to other countries.”
In
America, the drugs and devices lobbies are violently opposed to a
NICE-style agency that could issue mandatory rulings. They paint a
scary picture of Americans being denied access to life-saving new drugs
by faceless bureaucrats. In Britain NICE has come under fire for rulings that limited access to expensive drugs for Alzheimer’s and cancer on the NHS.
America
could get around this problem by requiring and perhaps even funding
studies, but leaving insurers and individuals to decide whether to pay
for treatments.
More competition and transparency would help, but the main goal of any
reform plan must be to address the perverse incentives that encourage
overconsumption and drive up costs. Medicare has been tinkering with
“pay for performance”, a promising experiment. Mr Halvorson insists
that by rejigging incentives other health providers can also create
their own “virtual Kaisers”. If American reformers doubt the power of
incentives, they should visit Sweden. Like other relatively cheap OECD
systems, Sweden’s single-payer model has been plagued by long
waiting-lists—a sign, to American conservatives, of the rationing that
goes with socialised medicine. Swedish health officials tried and
failed to cut queues by increasing direct funding for hospitals and
even issued an edict requiring hospitals to cut queues for elective
operations to three months. Then, last year, the health ministry said
it would create a fund into which it would pay SKr1 billion ($128m) a
year for local authorities that managed to reduce waiting times to that
threshold. Nine months ago virtually none of the counties passed, but
this month the health minister revealed that nearly all had cut their
queues to three months or less. Anders Knape, the head of the
organisation representing county governments, ascribes this to “a
dramatic change in incentives”. In the past, he explains, hospital
bosses believed waiting lists were a sign of being overloaded, so they
tolerated them in the hope of winning more funding. With the new
scheme, however, “no queues means more resources”.
If getting incentives right can mobilise even a state-run health system
like Sweden’s, surely there is scope for such reforms to fix America’s
mess too. If the United States couples its efforts to expand coverage
with such a radical restructuring of the underlying drivers of cost
inflation, there is every reason to think its health system can become
the best in the world—and not merely the priciest.