John R. Battista, M.D.

Prepared for Grand Rounds, New Milford Hospital, New Milford, CT

April 6, 2008

It is commonly asserted that the United States has the best health care system in the world. Yet, the United States ranks in the lower third of industrialized nations in terms of the two universally accepted measures of health care system efficacy: infant mortality and life expectancy. In addition, the United States health care system ranks at the bottom of the industrialized world in terms of efficiency (efficacy per dollar spent). Finally, the United States health care system ranks last in the industrialized world in terms of satisfaction. Thus, one could more readily argue that the United States has the worst health care system in the industrialized world rather than the best in the world. In fact, when the World Health Organization ranked world health care systems in 2000, the United States ranked 37^th, the worst in the industrialized world.

The poor efficacy of the American health system is generally understood in terms of poor access to health care for the uninsured and the Medicaid populations. The uninsured avoid clinical care because of the cost involved. They seek less care, do so later in the course of an illness, have less continuity of care, use more emergency services, die younger, and are more ill than the insured population. The poor have problems accessing care because the low reimbursement rate makes of Medicaid makes it difficult for them to find willing providers. This population tends to be more ill than the general population, although some of this illness may be a consequence of poverty rather than just limited access to health care. In addition, poor efficacy in the American health care system is a function of being treated through a managed care insurance program and being treated in a for-profit facility. However, in general, the poor efficacy of the United States health care system appears to be more the result of limited access to health care in some parts of the American population than the poorer quality of care associated with managed care and being treated in for-profit facilities. This conclusion is consistent with the fact that there are fewer outpatient visits and hospital days in the United States per person than in other industrialized countries.

As a result, most people and health care experts accept that universal health insurance improves a health care system’s efficacy. International experience supports this conclusion. For example, when Canada passed its universal health insurance program 30 years ago it had poorer efficacy data than the US. Now, 30 years later, it has better efficacy data than the US.

As a consequence, the vast majority of the public, physicians, and politicians support universal health insurance. The US debate about health care no longer centers on whether we should have universal health insurance, but rather how to get it, which really becomes a debate about how to pay for it, or how to make it affordable for the average person, and particularly the working poor, who dominate the uninsured population in the United States.

Extraordinarily high cost is the most striking characteristic of US health insurance, and the main reason why we have so many uninsured in this country. The United States spends twice as much per capita on health care than other industrialized countries, and 30% more than the second most expensive country in the industrialized world.

Why is the cost of health insurance so high in the United States relative to other industrialized countries? Two factors have been identified to account for this disparity: high administrative costs and the high cost of prescription medications.

Administrative costs in the United States are at least 25% of total health care expenses while they are under 10% in other industrialized countries, despite the fact that other countries do much more than we do in terms of community health care education and outreach. In fact, administrative billing expenses in other industrialized countries, which is what characterizes administrative expenses in the United States, are only 3% of total health care costs.

The cost of prescription medications is about twice as much in the United States as other industrialized countries. That is why some Americans seek to purchase their medications from Canada. The main reason medications are less expensive in other industrialized countries is because they negotiate the price of prescription medications, or bulk purchase them, something which is absent in substantial aspects of the US health care system such as traditional Medicare.

The magnitude of these differences in administrative and prescription medication costs is profoundly significant. For example, Physicians for a National Health Insurance Program has shown that by decreasing administrative costs and the cost of prescription drugs through a single payer mechanism enough money would be saved to provide comprehensive health insurance for the entire population, without co-pays, without changing anything about the health care delivery mechanism, and without increasing expenditures.

Why are administrative costs so high in the United States relative to other industrialized nations? Our higher administrative costs are directly related to having multiple insurance companies, and allowing these insurers to operate for-profit. First, multiple insurers with multiple plans increases the cost of marketing, leads to increased costs associated with changing insurance plans, and makes it more time consuming and costly for providers to deal with insurers. Second, allowing insurers to manage care increases administrative costs for both insurers and providers. Third, allowing insurance companies to operate for-profit increases administrative costs both through the profit generated and the higher salaries associated with for-profit corporations. As a consequence, for-profit Medicare, is 10 to 20% more expensive than not-for-profit Medicare. Procedures in for-profit health care facilities are 10 to 30% more than the same procedure in a not-for-profit health care facility. Overall, the administrative costs of for-profit insurers are strikingly higher than not-for-profit insurers. For example, the administrative overhead of Medicare is about 3% while most for-profit insurers have administrative overhead of between 15 and 30%.

Other industrialized countries have lowered costs for health insurance by six basic means: 1) guaranteeing or mandating health insurance, thereby avoiding increased expenses associated with the uninsured, 2) minimizing the number of insurers and minimizing the number of insurance plans available through them, 3) insisting these insurers operate not-for-profit, 4) negotiating the price of prescription drugs and bulk purchasing prescription medications, 5) capitating the expenses of hospitals and physician services instead of billing for these services, and 6) utilizing community standards and income, rather than risk standards, as the basis for determining the cost of health insurance.

The sixth and final point, paying for insurance as a function of income rather than a function of risk, is crucially important in being able to critically evaluate the current political debate about universal health insurance for the United States. In the United States, the insurance pool is fractionated into groups or individuals, and the cost of their insurance is calculated by assessing the health risk of that group or individual. The factors involved are typically age and illness history. As a result, health insurance is more expensive the older and sicker you are. This makes health insurance unaffordable for the near elderly, people who are ill, and people who are hourly workers. In the rest of the industrialized world, the cost of health insurance is calculated in relationship to community standards rather than individual or group risk. The total cost of health insurance for everyone in the population is determined and divided among the population so that each person, or employer, pays the same percent of their income, or payroll, for insurance (in some countries this is capped). The result is health insurance becomes much more affordable than in the United States. The young, the healthy and the wealthy subsidize the cost of health insurance for the old, the ill, and the poor. Such a system, where all people pay the same percent of their income for health insurance, appears to be much more ethical than the American system where the poor, ill and close to aged must pay more than the young, healthy and wealthy, although some conservatives argue the situation the other way around.

The problem for the United States is that such a income based health insurance financing system requires health insurance to be paid for through a public tax mechanism rather than a private billing mechanism. In addition, in order to be effective, such a public funding mechanism has required the stringent regulation, or the elimination, of the private insurance industry. This can be seen from studying the three types of universal health insurance which have been utilized by other industrialized countries: socialized medicine, as per Great Britain and Spain; single payer systems, as per Canada and many Scandinavian countries; and multi-payer health insurance pools, as per Germany and France.

In socialized medical systems the population is insured through public funds obtained through an income tax and value added tax. The government owns the health care facilities and physicians are paid a salary to work in hospitals, and a capitated rate to treat outpatients. Hospitals operate on a global budget. There is no billing for services. Great Britain and Spain allow individuals to opt out of the system by going into a private health care system. Such systems tend to be underfunded and have some waiting lines associated with them for non-acute services. They are much less costly than the US system while delivering comparable outcomes. They are quite similar to the VA System and the Kaiser System in the United States. There is little or no support for such a system for the United States where there is a strong belief that physicians should be paid fee for services and there should be free choice of health care providers, which is not characteristic of a socialized health care system.

The second model involves insuring the entire population with comprehensive health insurance paid through a single payer. Funding is accomplished through public funds for the unemployed, poor and retired in combination with a health care tax levied on families and employers, and a payroll tax on employers. These funds go into a health care fund that is administered by a regional public office in accord with national policy. Rates and coverage are set by the regional administrator in negotiation with health care providers. Health care workers are paid fee for service. There is no managed care. There is free choice of health care providers.

This is the system most health care reformers advocate for the United States. However, they suggest the single-payer system be administered by a not-for-profit trust controlled by a board of health care providers, health care advocates and taxpayers reportable to government rather than administered by the government itself. With such a system it is predicted that it would be possible to have comprehensive health insurance, without co-pays, for all Americans with a 6.5% income tax and a 6.5% payroll tax while maintaining the current funding for the Medicaid and CHIPS programs. Medicare would be eliminated. There would be no managed care. Physicians would be able to negotiate fees for services on a yearly basis. The vast majority of families and corporations that currently provide insurance for their employees would save substantial amounts of money under a single payer system, and Americans would have far more comprehensive and superior health insurance than they currently have.

Critics argue that the comprehensive insurance of a single payer system would force people to pay for services they don’t want or need. It would penalize the young, the healthy and the wealthy. Others falsely argue this would be socialized medicine or constitute additional government control.

This model is supported by about 60% of the population and physicians, but has little support among politicians or corporations, who wish to sustain the private insurance industry that would be eliminated under this model. Such a single payer system is currently under consideration by the US Congress in the form of House Bill 676, introduced by Representative Conyers with 80 co-sponsors. This particular bill utilizes a rather radical form of funding in which individuals and corporations essentially pay 3.5% of their income and payroll for insurance and the remainder of the funding is obtained from the top 5% of wage-earners in combination with public funds for the poor and near-poor. It has little of no chance of passage.

The third form of universal health insurance involves putting workers into large insurance pools. France utilizes three pools, and Germany close to 200. As a consequence this health care insurance system has higher administrative costs than single payer or socialized systems, although still much less than the United States. In any case, these not-for-profit insurance pools are highly regulated, quasi-public institutions that share profits and losses, and offer only comprehensive health insurance. They are funded through a health care tax, an employer payroll tax, public funds for the unemployed and retired, and other taxes such as taxes on activities detrimental to health. These insurance pools have little or no resemblance to the for-profit insurers. They are not publicly traded companies who have a responsibility to stockholders. They are not-for-profit quasi-public institutions who have a responsibility to the people they insure and negotiate on their behalf with health care providers for fees and services. Such a system, does have co-pays associated with it, most of which are covered by private supplemental insurance. However, there is a mandated cap on these co-pays to insure that there is no bankruptcy associated with health care. There is no managed care. There is free choice of health care providers. In France, there is a lower rate of physician reimbursement, and physicians tend to earn a lower income relative to the general population than in the United States. This is compensated, in part, by the fact that medical school is free so that physicians enter practice without educational debt.

American politicians, who predominantly support universal health insurance, but wish to maintain private insurance companies, have been interested in altering the multi-payer system of Germany and France to the United States by mandating the purchase of private health insurance and leaving the private, for-profit, insurance system intact. This idea of a mandate on individuals is commonly combined with a mandate on employers to either provide health insurance for their workers or pay into a public fund which would assist such workers in obtaining health insurance.

Mandate systems, which do exist in Germany for example, can result in close to universal coverage. However, it appears this can only be accomplished when the payment for such a system is accomplished through a public means, such as a payroll or income tax, with the government taking up responsibility for the non-employed population. In addition, a mandate system would need to mandate a comprehensive health insurance program including preventative and outpatient services to solve the efficacy problem in the United States. Bare bones or major medical insurance, without outpatient coverage, will do little to solve the efficacy problem for the United States. Similarly, unless the insurance limits co-pays and avoids caps on total expenses, it will do little or nothing to solve the problem of bankruptcy associated with major medical illness. In addition, if the United States were to continue to utilize for-profit insurance companies, with their higher administrative rates and risk based accounting methods, mandated insurance would continue to be much more expensive than what could be obtained through a public funding mechanism. As a consequence, a mandate system in which the private insurance system is maintained would have serious cost problems associated with it and require substantial public subsidy. In the end, this approach would constitute a subsidy for the insurance industry with public funds. Although such subsidizes of corporations have become common in this era of corporate capitalism, such a mandated health care system would continue to be opposed by the majority of health care advocates who believe a single payer system would be much more ethical, effective, and cost-efficient, while maintaining the fee for service culture of traditional American medical practice and traditional, free market, enterprise.