Thursday, July 31, 2014

qotd: Victor Fuchs on the solution for high health care costs in U.S.

The Atlantic
July 23, 2014
Why Do Other Rich Nations Spend So Much Less on Healthcare?
By Victor R. Fuchs

Despite the news last week that America's healthcare spending will not
be rising at the sky-high rate that was once predicted, the fact remains
that the U.S. far outspends its peer nations when it comes to healthcare
costs per capita. This year the United States will spend almost 18
percent of the gross domestic product (GDP) on healthcare.

Why does the United States spend so much more?

The biggest reason is that U.S. healthcare delivers a more expensive mix
of services. For example, a much larger proportion of physician visits
in the U.S. are to specialists who get higher fees and usually order
more high-tech diagnostic and therapeutic procedures than primary care

A second important reason for higher healthcare spending in the U.S. is
higher prices for inputs such as drugs and the services of specialist
physicians. The prices of branded prescription drugs in the U.S. are, on
average, about double those in other countries. The fees of specialist
physicians are typically two to three times as high as in other
countries. The lower prices and fees abroad are achieved by negotiation
and controls by governments who typically pay for about 75 percent of
all medical care. Government in the U.S. pays about 50 percent, which
would still confer considerable bargaining power, but the government is
kept from exerting it by legislation and a Congress sensitive to
interest-group lobbying.

The third and last important reason for higher spending in the U.S. is
high administrative costs of insurance. Many of our peer countries have
lower administrative costs through more coordination, standardization,
and in some countries a single national system or several regional
healthcare-insurance systems, even when the provision of care is
primarily a private-sector responsibility.

The complexity of private-sector insurance is not in the public
interest. Each company offers many plans that differ in coverage,
deductibles, co-pays, premiums, and other features that make it
difficult for buyers to compare the prices of different policies.

If we turn the question around and ask why healthcare costs so much less
in other high-income countries, the answer nearly always points to a
larger, stronger role for government. Governments usually eliminate much
of the high administrative costs of insurance, obtain lower prices for
inputs, and influence the mix of healthcare outputs by arranging for
large supplies of primary-care physicians and hospital beds while
keeping tight control on the number of specialist physicians and
expensive technology. In the United States, the political system creates
many "choke points" for diverse interest groups to block or modify
government's role in these areas.

For those who would like to limit government control, there is an
alternative route to more efficient healthcare through "managed
competition," proposed by Alain Enthoven, a Stanford University Business
School Professor, more than 25 years ago. It is based on integrated
group practice, which brings the insurance function, physicians,
hospital, drugs, and other elements of care into a single organization
that takes responsibility for the health of a defined population for an
annual risk-adjusted per capita payment. Examples include the Group
Health Cooperative of Puget Sound in Seattle and the Kaiser Permanente
organizations in California.

With regard to healthcare, the United States is at a crossroads. Whether
the Affordable Care Act will significantly control costs is uncertain;
its main thrust is to reduce the number of uninsured. The alternatives
seem to be a larger role for government or a larger role for managed
competition in the private sector. Even if the latter route is pursued,
government is the only logical choice if the country wants to have
universal coverage. There are two necessary and sufficient conditions to
cover everyone for health insurance: Subsidies for the poor and the sick
and compulsory participation by everyone. Only government can create
those conditions.


Comment by Don McCanne

Highly respected Stanford economist Victor Fuchs has long supported
private solutions to universal coverage, such as Alain Enthoven's
managed competition. Although there is much to be said for establishing
integrated health care delivery systems within the community, the
logistics of providing all care through competing integrated delivery
systems have proven to be insurmountable, as witness the managed care
revolution that reduced this concept to competition between inefficient,
expensive and intrusive third party insurer money managers.

Fuchs now notes that "the complexity of private-sector insurance is not
in the public interest." He acknowledges the crucial role of government
in other nations. He states that we are now at a crossroads between "a
larger role for government or a larger role for managed competition in
the private sector." Even if private managed competition is selected,
"government is the only logical choice if the country wants to have
universal coverage."

But look at the government requirement he would impose if the private
managed competition option were selected: "Subsidies for the poor and
the sick and compulsory participation by everyone." We already have that
in the Affordable Care Act, and yet we will be left with 31 million

At least Fuchs is right when he says, "Only government can create those
conditions." But the vehicle has to be functional. That's why we need to
do it through a single payer national health program. We can still have
our integrated health care delivery systems that Arnold Relman also
supported, but in addition we will need the other components that make
the system work efficiently for all of us.

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