The danger of consumer-driven health care.

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NOVEMBER 7, 2005

The danger of consumer-driven health care.

A few hundred dollars a year. Maybe more than a thousand. Rex Delph
really couldn't be certain how much larger his medical bills would
be if his employer, the school board of Knox County, Tennessee,
decided to swap health insurance plans. All Delph knew was that
even a modest increase could end up financially overwhelming him.The problem for Delph wasn't so much his own medical bills. The
45-year-old school electrician was in relatively good health,
except for a hernia that doctors said he could live with as long as
he watched his diet. The problem was his wife, Jacqueline, who had
been diagnosed with Addison's disease about two years earlier.
Addison's occurs when the adrenal gland fails to manufacture enough
of certain hormones. If treated, it's not fatal. (John F. Kennedy
lived with it.) But it's also not curable, with symptoms that can
include severe muscle weakness, vomiting, and depression. "She's
lost so much strength," Delph would later explain. "She can still
get around, but she has to be real careful in what she does. She
can't go to the amusement park and get all whipped around. She's
not supposed to lift anything more than ten pounds."

The standard treatment for Addison's is steroids. And, in
Jacqueline's case, they had certainly helped. But the steroids were
expensive, as were the checkups to monitor them--not to mention the
occasional hospital visits her condition required. The insurance
Delph had, identical to the generous policy the county's teachers
had won through their union, covered most of these costs. But, this
August, the school board, desperate to shave its budget, began
talking formally about adopting a new policy with lower premiums but
much higher co-payments. This would mean larger out-of-pocket
expenses every time Delph or his wife filled a prescription, saw a
physician, or went to the hospital.

For employees in good health, the ones who didn't need much medical
care, it was actually a pretty good deal. And, when the school
board circulated a survey before taking up the matter formally,
several of those employees expressed enthusiasm for the lower
premiums and the modest, yet much-needed, measure of financial
relief they would bring. "What took so long??" one employee wrote,
according to an account in the Knoxville News-Sentinel. "This is
more affordable for single, 1-parent heads of household. Thanks."
But, for Delph, who made around

$30,000 a year and whose wife could no longer work, those $200
physician visit deductibles and $20 prescription co-pays loomed
large: "Right now, with the bills I've got, we're just barely
breaking even," he said. "It would have been a pretty good
hardship."

Delph was hardly the only American confronting such a situation. On
the contrary, with the economy sluggish and health care costs
rising so quickly these last few years, employers have increasingly
taken action like the Knox County school board was contemplating:
They've passed on some of the increased costs to their employees,
as higher deductibles and co-payments. According to a survey of
large employers released just two weeks ago by Hewitt Associates,
the consulting firm, out-of-pocket medical expenses alone is
costing workers an average of

$1,366 this year, up from $708 in 2000. And that figure is just the
average. People who use a lot of medical services this year will
likely pay more--in some cases, a lot more.

Is that the way we want to pay for health care in America? President
Bush seems to think so, as does a chorus of Republican officials,
conservative intellectuals, and corporate chieftains. They would
like to move the country even further in the direction Knox County
was thinking of pushing its workers, from a system of comprehensive
insurance to one in which most people have insurance covering only
the most catastrophic costs--i.e., the really big bills that come
from a life-threatening illness or a severe accident. In the scheme
they envision, Americans would pay for everything else on their own,
preferably by using money they've invested in special,
tax-preferred "health savings accounts," or HSAs.

While the champions of this worldview make many claims on its
behalf, the most politically important one is that, by encouraging
consumers to take more control over how they pay for medical
treatment, HSAs, combined with high- deductible insurance, will
help keep health care affordable. "With HSAs, we introduce market
forces," Bush said during a speech in Pennsylvania last year. "It
means you can shop around for the care that's best for you. It means
you'll be able to get better health care at better prices, 'cause
you're the decision- maker." But, as the Delphs could attest, the
transformation Bush and his allies envision could well have a
blunter, less appealing effect: It would place the burden for
severe medical expenses more squarely on families that incur them.
Not only would that force families like the Delphs to choose between
taking on debt and forgoing medical care. It would also represent a
sharp departure from the philosophy of solidarity and shared risk
that has governed America's approach to health care for over 70
years.

The question of how to distribute the financial responsibility for
America's health care bill dates back to the late '20s and early
'30s. This was a time when widespread use of x-rays, development of
sophisticated anesthetic techniques, and other medical advances
meant that doctors and hospitals could cure rather than just
comfort. But with these new abilities came new costs, and, for the
first time, large numbers of people were struggling to pay their
medical bills. In 1929, half the country's families would have had
to pay the equivalent of one month's income for a hospital stay.

Of course, it was only the families with serious medical problems
that ran into such high costs. But that was precisely the problem,
according to the Committee on the Cost of Medical Care, a privately
funded task force whose 1932 report is considered the first
thorough review of health care costs in U.S. history. The Committee
determined that, although the total cost of health care in the
United States (then around 4 percent of national income) was one
the nation could certainly afford, most of the burden fell on a
relatively small number of people who, because of accidents or
serious disease, required extensive medical care. And, while some
people saved money for the possibility of future medical expenses,
the Committee concluded, "[T]he unpredictable nature of sickness
and the wide range of charges for nominally similar services render
budgeting for medical care on an individual family basis
impracticable."

Other countries were solving this problem by creating national
health insurance systems that covered all (or nearly all) citizens,
thereby spreading the financial burden for medical care to the
broadest possible group. But, while reformers in this country had
been agitating for a similar program since the late Progressive
era, even during the Great Depression the opposition of powerful
interest groups like physicians, who feared intrusions into their
professional autonomy and limits on their incomes, was enough to
keep universal health care off the political agenda. (FDR is said
to have dropped health care from the Social Security Act, because
he feared the hostility from state medical societies might doom the
entire package.)

In the absence of national health care, a much different system
evolved. It began in 1929, in Dallas, Texas, when Baylor Hospital,
desperate to fill its beds with paying customers rather than
charity cases, approached the public school teachers of Dallas with
a deal: If most of the teachers would agree to pay the hospital a
small amount of money every month, then the hospital would agree to
provide medical services to any teacher who needed it, anytime. The
plan was a hit, and soon hospitals around the country, most of them
facing similarly dire financial situations, began copying and
expanding the Baylor plan, which eventually became the Blue Cross
system. By the 1940s, it was enrolling millions of new people each
year--a pace that quickly lured the commercial insurance industry,
which had dabbled unsuccessfully with disability- style benefits in
the early twentieth century, back into the business.

As private insurance spread, the link to employment became
entrenched--in part because large workforces guaranteed a large
number of healthy beneficiaries to cover the costs of those few
with severe illness, and in part because employers themselves found
it advantageous. (As Yale political scientist and occasional tnr
contributor Jacob S. Hacker has noted recently, private job-based
insurance not only warded off the threat of government intrusions
into health care, which business opposed philosophically; it also
helped undercut the appeal of unions.) Government encouraged this
arrangement by exempting employer health insurance from taxes--in
effect, making health insurance connected to a job more valuable
than cash on a dollar-for-dollar basis. By the 1970s, the vast
majority of working-age Americans had private health insurance
through their jobs. They still paid for this coverage indirectly,
through the lost wages their employers were spending instead on
health insurance. But they shared it among themselves, for
relatively modest sums, rather than facing it individually, at
potentially crushing levels. And most of these people seemed to
think the system worked very well.

But it might have worked too well. Critics had long worried about
the "moral hazard" of insurance--the possibility that generous
benefits might encourage people to seek care they really didn't
need or to consume care with little regard for its cost. In the
'70s, an experiment by the rand Corporation seemed to bear this
out, at least in part, by demonstrating that, once health plans
exposed people to some medical costs--by, say, requiring them to
make co- payments for doctor and hospital visits--they used less
health care. In previous decades, employers hadn't really obsessed
over moral hazard, if only because health care really wasn't that
expensive once you distributed the cost broadly. But, by the '70s,
with medical costs gobbling up more than 7 percent of national
income while global competition was squeezing U.S. manufacturers,
employers became anxious to limit the liability for their workers'
health care expenses that they had worked so hard to secure a few
decades before.

In the 1990s, this mindset led employers to switch their workers
into health maintenance organizations (HMOs) and other forms of
managed care. Managed care promised to hold down medical bills by
restricting beneficiaries' access to medical services--and then
bringing down the price of those services through hard-nosed
bargaining. Managed care put a great deal more power in the hands
of insurance companies. And, at least for a few years, they were
successful at holding down the cost of medicine. But managed care's
techniques were never popular. Individual doctors and hospitals
resented the medical second-guessing, not to mention the bullying
about prices. Consumers resented the limits on what doctors they
could see and what treatments they could get. Soon, politicians on
both sides of the aisle were looking for another way.

Jesse Hixson was a relatively small-time government economist with a
big- time economic problem on his hands. The year was 1974, and
Hixson, who worked for the Social Security Administration, had been
asked to help devise a system for containing the cost of Medicare,
the federal health insurance program for the elderly that had been
established during the '60s and was already starting to overwhelm
the federal treasury.

At the time, Medicare worked a lot like traditional private
insurance: It covered pretty much everything doctors or hospitals
ordered up, at whatever prices they set. Many experts thought
health care providers were the source of the program's
trouble--that, in order to control costs, Medicare needed to start
demanding hospitals charge less. Hixson, by contrast, focused on
the patients, arguing that they had insufficient incentive to
question medical decisions or seek out cheaper treatments--a
classic example of moral hazard. Private insurance had already been
adapting to deal with this problem, introducing larger co-payments
or deductibles in an effort to make beneficiaries think twice
before seeing a doctor or agreeing to a treatment. Hixson figured
he could do that idea one better: He suggested giving Medicare
beneficiaries special savings accounts, which they would use to
cover medical expenses.

Hixson's idea didn't persuade the Medicare bureaucracy, which
eventually decided on a different method of restraining the
program's costs. (In the early '80s, the federal government would
start paying hospitals based on diagnosis, rather than the services
rendered, as a way to force down their charges.) But Hixson kept
talking up his idea anyway, and continued to do so even after he
left the government to work for the American Medical Association.
Hixson eventually got the attention of another economist, John
Goodman. Goodman, who ran a Dallas-based conservative think tank
called the National Center for Policy Analysis, was philosophically
sympathetic to the idea that altering patient incentives was the
key to making health care work like a free market again. And, while
Medicare might not have been interested in the idea, Goodman
figured that private insurers might be. Together with some
colleagues, he fleshed out the idea of "medical savings accounts"
(MSAs), proposing that they get tax benefits like IRAs. He spread
the word around Washington, where his think tank helped coordinate
a series of meetings among business leaders and conservative
intellectuals. That got the attention of a third key figure, J.
Patrick Rooney, chairman of Golden Rule Insurance.

Rooney, who was on his way to becoming one of the nation's
better-known right-wing activists, shared Goodman's ideological
predisposition. But MSAs had a certain financial appeal to him as
well. Golden Rule, which Rooney had rescued from bankruptcy a
decade earlier, was in danger of losing ground again because it
could not keep up with the large insurers that were erecting huge
managed-care networks of doctors and hospitals to lure patients.
MSAs looked like an ideal niche business that Golden Rule could
capture and parlay into a permanent market presence. Rooney began
with Golden Rule's own employees, replacing their traditional
insurance with high-deductible coverage plus MSAs, which Golden
Rule funded, allowing employees to keep what they didn't spend.
Then he went to work on Washington, selling the idea that MSAs could
work for the rest of the country if the government made the money
in them tax-free, as Goodman had envisioned.

The health savings crusade by Goodman and Rooney had a certain
quixotic quality about it in those early years. But that changed in
1993, when President Clinton proposed a comprehensive health care
overhaul that would have guaranteed affordable private insurance
coverage to every American, with most people likely to get their
coverage through managed care. Republicans, convinced that they
couldn't beat something with nothing, were desperate for an
alternative. And Goodman's plan fit their philosophical outlook
perfectly. As they saw it, the Clinton plan took power away from
patients by shunting them into managed care plans; the Goodman plan
empowered patients by giving them more freedom to choose doctors
and pick treatments. The Clinton plan fought high prices by giving
government bureaucrats the power to regulate insurance premiums;
the Goodman plan fought high prices by giving consumers the power
to shop for bargains. The Clinton plan created a fiscally reckless
entitlement; the Goodman plan instilled responsibility by punishing
the profligate and rewarding the thrifty.

In the end, the Republicans were able to defeat Clintoncare without
actually rallying behind an alternative. But the advocates of MSAs
had made an impression on the GOP leadership, particularly Newt
Gingrich. Gingrich ended up forging a close working relationship
with Rooney, who, in addition to sharing the House speaker's
passion for school vouchers, was a top source of funding for
Gingrich's own political ventures and that of the Republican Party.
(In 1993-1994, according to an account in Mother Jones, Rooney and
his affiliated political action committees steered nearly

$1 million into Republican Party coffers, third only to Amway and
Philip Morris.) In 1996, with Gingrich's support, an initiative
exempting money in MSAs from taxes became law.

The initiative progressed slowly, at first, because employers
weren't all that enthusiastic: Managed care was holding down costs
just fine, and, given the tight competition for labor in the strong
economy, companies didn't want to risk alienating employees with
yet another massive benefits change. In addition, at the behest of
Democrats and Clinton, the 1996 law had carefully circumscribed the
growth of MSAs: Only individuals and small businesses could sign
up. No more than 750,000 could be sold in any year. And the entire
program would be up for review in a few years, at which point it
might very well be canceled altogether.

All of that began to change in 2000, when Bush began to talk up the
idea of health savings accounts during the presidential campaign.
He seemed primarily interested in it as a way to counter Al Gore's
more ambitious plans to expand health care coverage through
government programs, much as the Republicans of 1994 had gravitated
to Goodman's plan as a way to defeat the Clinton health care plan.
But the MSA concept was also consistent with Bush's "ownership"
agenda, since it stressed greater personal stewardship of medical
spending. In 2003, Bush and his Republican allies rechristened MSAs
as HSAs, lifted the cap on enrollment, ended their temporary
status, and tied them to even more generous tax breaks.

Employer attitudes were shifting, too. Managed care wasn't holding
down costs anymore, and the economy had slackened, giving employers
more leverage to impose benefit changes on their workers. As the
business community began talking more about its need to limit its
liability, large insurers--everybody from the modern Blue Cross
plans to the giant national carriers, such as Aetna and
Cigna--began rolling out HSA products to meet the demand.
(UnitedHealth simply acquired Golden Rule, for which Rooney
collected

$500 million.) Some 2.4 million people have now signed up for HSAs
and similar forms of coverage, according to the latest estimates by
the Kaiser Family Foundation. By 2010, consumers are likely to have
amassed between $10 billion and $26 billion in HSAs, according to a
recent Wall Street Journal article.

HSA enthusiasts frequently describe the accounts as the key to
ushering in an era of "consumer-driven health care." As they see
it, traditional insurance has numbed patients to quality as well as
costs. HSAs, by contrast, would encourage them to act like real
consumers: seeking out the most effective treatments, the most
qualified doctors, and the best-run hospitals. Similarly, once
consumers realize how much medical treatment can cost, they'll get
more serious about healthy living--just to avoid the bills. "We're
going to re- center the system on the individual," Gingrich said in
a speech last year. "I want to capture you before you're a patient
and make sure that you have the right devices at home, you're
taking the right medication to avoid getting sick, you have the
right supplements, you're eating the right food, you're doing the
right exercise."

Pretty much everybody would like to see consumers become more
informed about their medical care and develop healthier lifestyles.
But will HSAs really accomplish that? There's reason to wonder.
Consumers need good information in order for a market to work. And
good information on health care is just not that easy to find.
Within the federal government, the Centers for Medicare and
Medicaid Services recently began publishing information on hospital
quality, in the hopes of steering beneficiaries to the best
providers. But, while a few basic criteria are helpful in drawing
narrow judgments--generally speaking, you want to get a surgical
procedure at a hospital that does a large quantity of them--others
can be grossly misleading. Does a high mortality rate suggest a
hospital has lousy staff? Or does it mean the hospital simply takes
on the most difficult cases?

Even some fans of the health savings approach wonder about the
ability of patients with limited medical knowledge to make smart
decisions about care, particularly since comparison shopping among
hospitals can be difficult when you're dealing with an urgent
medical situation. "[A]sking consumers to `drive their health
plans,'" one HSA promoter, who happens to be a physician, wrote
earlier this year in an op-ed, "is like asking blind people to
become nascar drivers."

To their credit, some HSA advocates have campaigned hard to improve
the publicly available information about medical care, even if it
takes the strong arm of the government to do it. But, no matter how
much information consumers have, who's to say they will make good
decisions? Many experts worry that, by giving patients so much
incentive to be thrifty, HSAs will encourage them to scrimp on
routine or preventative care--thus increasing the likelihood of
large medical bills later. At the same time, they say, they're
dubious that the prospect of eventually building up a fat HSA
balance will somehow convince people to live healthier lives now.
"How rational do you think people are?" asks David Cutler, a
Harvard economist and author of Your Money or Your Life. "Think
about it this way: The biggest cost of having a heart attack or
cancer isn't the financial one. It's the probability that you die.
... There's still a lot of incentive to do the right thing. And yet
people don't."

Figuring out whether HSAs will end up making people healthier is
ultimately a matter of conjecture. The same cannot be said for its
impact on the way the financial burden of medical care falls on
different parts of the population. Health care operates by what
economists commonly call an "80/20" rule. In any given year, most
of the money being spent on medical care in the United States
(about 80 percent of the total) is for the relatively small portion
of Americans (about 20 percent of the population) recovering from
severe accidents, fighting off a life-threatening disease like
cancer, or struggling with a serious chronic condition like
diabetes.

It's really no different from the situation the Committee on Cost
described in the early '30s, except that, now, traditional health
insurance spreads the financial burden, using premiums paid by
people who don't use many medical services to help pay the bills of
those who do. The trouble with HSAs is that they change the
equation, dramatically, allowing people in relatively good health
to keep much more of their own money. "One hundred percent of the
time it makes sense for a healthy person to take the savings
account," one benefits consultant explained in The Tampa Tribune.
"That's a no-brainer." But, once that happens, there's less money
to subsidize care for the people with high medical bills--which
means those people must either make up the difference themselves or
simply go without care. "A wholesale switch to [HSAs] would
redistribute the nation's overall financial burden of health care
from the budgets of chronically healthy families to those of
chronically ill families," Princeton economist Uwe Reinhardt has
written. "One should simply not brush these ethical issues aside."
(To see what happened when South Africa tried consumer-driven
health care, see David Adler, "Medical Error," page 16.)

In their defense, HSA enthusiasts point out that people with serious
medical problems are free to stick with traditional insurance. But,
by luring healthy people and their premiums away from traditional
insurance, HSAs would still drain money from the existing system,
leaving the unhealthy to make up the cost. And, sure enough, it's
healthy people who seem to be rushing into HSAs the fastest. When
Humana Inc. began offering HSAs to its workforce in 2001, the
employees who chose it were "significantly healthier on every
dimension measured," according to a study published last year in
the journal Health Services Research. And the anecdotal evidence
certainly backs that up. Articles quoting enthusiastic HSA
enrollees, which seem to appear in some local newspaper almost
every day now, inevitably feature people like the 20-year-old
worker at a Seattle drive-in restaurant who recently told the
Seattle Post- Intelligencer, "If you're a pretty healthy
individual, and you don't need to go to the doctor or expect that
something might happen, it's a good plan."

Back in Knox County, Rex Delph grasped the implications for people
like him. And so, it turns out, did most of his co-workers. The
vast majority of employees who responded to the survey opposed the
change. "Please consider keeping the insurance we have," one school
worker wrote. "Even though the County has a cheaper monthly plan,
the out of pocket expense is way out of line for the amount I bring
home in my monthly paycheck." Other employees were even more
direct: "We make the least salary and can't afford these high
deductibles out of pocket.... Being a widow, if I have a major
illness, I will not be able to go to the hospital. Please don't
change us, I beg you!" In the end, the county listened and did not
change the insurance after all.

Of course, most companies don't have to deal with the state
regulations (and strong unions) that school boards do. If they want
to impose changes in benefits, they'll find a way. But maybe that's
not such a bad thing. Pressing employers to keep bearing an
ever-larger financial burden on behalf of their workers really does
punish them financially--and, contrary to the rhetoric of some
critics, in ways that affect more than simply executives and
shareholders. In the public sector, it drains budgets and diverts
money from other needs. Once officials at the Knox County school
board decided to keep the present insurance benefits, they had to
cut gifted and talented classes in their middle schools instead. In
the private sector, it puts companies that provide good benefits at
a competitive disadvantage. It was precisely this issue that
sparked a massive strike of grocery workers in California two years
ago. With the threat of competition from Wal-Mart, a company that
provides relatively low benefits, the established supermarkets in
California felt they had to cut benefits, too, or end up with
debilitating labor costs.

Eventually, employers are going to find some way out from under the
burden of employee insurance, if not by reducing benefits then by
offering coverage to fewer workers. (Either that, or--like the U.S.
auto industry, which has struggled with the cost of maintaining
generous benefits it guaranteed years ago--they are going to risk
bankruptcy.) So perhaps the best response to the erosion of
job-based insurance is to admit that it's obsolete and come up with
an alternative, one that remains faithful to the idea of shared
responsibility for medical hardship that Bush and the conservative
movement seem so determined to jettison.

After all, not only is the idea of sharing responsibility for health
care costs a part of our history, it reflects the attitudes of most
Americans today. Polls have shown Americans are in no rush to
expose themselves to greater financial risk; on the contrary,
whether it's Social Security or health insurance, they seem to
prefer greater protection. Unlike the Bush administration, they
have the imagination to envision the devastating changes of
fortune--a chronically ill spouse or child, for example--that make
a communal system not only the right thing to do but also in their
own self- interest.

This is why we need to go back to the guiding principle of group
health care- -that the way to both lower costs and serve as many
Americans as possible is to broaden, rather than shrink, the
patient pool. One way to do this is through the plan we've been
flirting with since the Progressive era--universal health coverage.
These days, the case for it seems stronger than ever. Depending on
how it's structured, universal health care would either limit or
eliminate altogether the employers' responsibility for their
workers' health bills, by transferring greater financial
responsibility to an even broader base: the entire population,
through some combination of taxes and premiums. And it could have
modest co-payments and deductibles--large enough to deter moral
hazard but not so large that individuals face financial ruin.

This isn't to say universal health insurance makes the trade-offs
between cost, access, and quality disappear. On the contrary, it
would force a more explicit, inevitably uncomfortable, discussion
of how much Americans are willing to pay for basic health care--and
what kind of services they would have a right to expect in exchange
for that money. It would undoubtedly put more pressure on the
medical industry and health care professionals to actually cut
their prices, resulting in less income for both. And, finally, it
would mean a redistribution of health care money from the wealthy
to the poor, because the more expensive medicine gets, the more
even modest cost-sharing would expose these people to severe
financial hardship. Many of those ideas are anathema to the
conservatives. But, if the people of Knox County are indicative,
the majority of Americans may disagree.

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