PHA-Exch> Competition in a publicly funded healthcare system

[Laura Turiano]

http://www.bmj.com/cgi/content/full/335/7630/1126

BMJ  2007;335:1126-1129 (1 December), doi:10.1136/bmj.39400.549502.94
Analysis
Competition in a publicly funded healthcare system
Steffie Woolhandler, associate professor of medicine, David U
Himmelstein,associate professor of medicine

Department of Medicine, Cambridge Hospital, Harvard Medical School,
Cambridge, MA, USA

Correspondence to: D U Himmelstein, 1493 Cambridge Street, Cambridge, MA
02139, USA david_himmelstein at hms.harvard.edu
<mailto:david_himmelstein at hms.harvard.edu>

Are the UK and other countries right to adopt a market based model for
improving their health services? Steffie Woolhandler and David
Himmelsteinbelieve that the appropriate response to the US experience with
such policies is quarantine, not replication

Why would anyone choose to emulate the US healthcare system? Costs per
capita are about twice the Organisation for Economic Cooperation and
Development average. Forty seven million people are completely uninsured.
Many others with insurance face high out of pocket costs that hinder care
and bankrupt more than a million annually.  Mortality statistics lag behind
those ofmost other wealthy countries, and even for the insured population,
clinical outcomes and patient satisfaction are mediocre.

This dismal record arises, we contend, from health policies that emphasise
market incentives. Even as the public share of health spending in the US has
risen to 60% (box) investor owned firms have eclipsed the public,
professional, and charitable bodies that previously managed the financing
and delivery ofcare. The development and effect of US policies that mix
public funding and private management has wider relevance because
politicians in Europe and beyond are pushing analogous schemes.

Tax financed health spending in US
* Official figuresfor 2005 peg government's share of total healthexpenditure
at 45.4%, but this excludes:
>> Tax subsidies for private insurance, which cost the federal treasury $188.6bn
>> (£92bn; 129bn) in 2004 and predominantly benefit wealthy taxpayers Government
>> purchases of private health insurance for public employees such as police
>> officers and teachers. Government paid private insurers $120.2bn for such
>> coverage in 2005: 24.7% of the total spending by US employers for private
>> insurance  
* Government'strue share amounted to 9.7% of gross domestic productin 2005,
60.5% of total health spending or $4048 percapita (out of total expenditure
of $6697) 
* By contrast,government health spending in Canada andthe UK was 6.9% and
7.2% of gross domestic profitrespectively (or $2337 and $2371 per capita)
* Governmenthealth spending per capita in the USexceeds total (public plus
private) per capita healthspending in every country except Norway,
Switzerland, and Luxembourg

Failure of private contracting in Medicare

The combination of tax funding and market oriented delivery is exemplified
by the US Medicare programme, which has a budget more than double that of
the entire NHS. Until 1965, many US employers offered private health cover,
but elderly, poor, and disabled people were mostly uninsured and forced to
rely onthreadbare government institutions or charity. In 1965, Congress
established the Medicare social insurance programme for elderly people.
Private hospitals gained a vast new market, and investors soon took note,
launching for-profit chains that now account for 15% of US acute care
hospitals. Similarly, for-profit dialysis firms rushed in after the
government made everyone with end stage renal disease eligible for Medicare
in 1972.

Until the 1970s, private insurers (mostly founded and controlled by doctors
and hospitals) and Medicare exerted minimal oversight of care and payment
rates. But soaring costs prodded employers and government to assert more
control. In the private sector, managed care and health maintenance
organisations (HMOs)‹most of which were controlled by investors rather than
health providers and vigorously intervened in clinical care‹rapidly gained a
foothold.

In the mid-1980s, Medicare also began encouraging elderly people to enrol in
private HMOs. Government paid the private plans a fixed monthly premium for
each person who switched from traditional (fee for service) Medicare, with
the HMO taking over responsibility for purchasing (or, rarely, providing)
care. This arrangement was touted as a means to bring market efficiency to
the publicprogramme and to broaden patients' choices.

Unfortunately, the first crop of Medicare HMOs yielded mainly scandal‹for
example, a major political donor whose plan enrolled thousands of aged
patients in Florida (and collected tens of millions of government dollars)
but neglected to contract with doctors or hospitals to care for them. He
fled prosecution, eventually seeking refuge in Spain.

Subsequently, Medicare applied stricter regulations. The government set the
HMOs' payment at 95% of the average monthly cost of care for a patient in
traditional Medicare, with the expectation of 5% savings through improved
efficiency. Patients who chose an HMO‹attracted by free spectacles, lower
copayments, and other benefits not covered under traditional
Medicare‹werefree to return to traditional Medicare whenever they wished.

HMOs recognised an opportunity in the skewed distribution of health costs.
Most patients use little care‹indeed 22% of elderly people cost Medicare
nothing at all each year‹while the fraction who are severely ill account for
the lion's share of expenditures. Astute HMO executives quickly realised
windfallprofits through cherry picking‹recruiting healthier than average
older people who brought hefty premiums but used little care‹and returning
sick patients, and their high medical bills, to the traditional Medicare
programme‹disruptingcare for millions.

HMO marketing departments devised selective recruitment schemes to attract
healthy people. These included free fitness club memberships, complimentary
recruiting dinners at times and places inaccessible to frail elderly people,
and advertisements painted on the bottoms of swimming pools. HMOs used
financial incentives to encourage doctors to persuade sick patients to leave
theHMO‹for example, deducting payments to specialists from the primary care
doctor's own capitation payment. Hence, a general practitioner could raise
her income by advising patients needing hip replacement to leave the HMO,
and even convince herself that such advice might benefit patients by freeing
them of HMO restrictions on the choice of surgeon and hospital.

HMOs concentrated on ensuring convenient and attractive care for the modest
needs of healthy (and profitable) older people. Meanwhile, expensive, ill
patients fared poorly. Stroke patients, those needing home care, and others
with chronic illnesses got skimpy care, had bad outcomes, and fled HMOs.
And when all else failed and an HMO found itself saddled with too
manyunprofitably ill patients in a particular county, executives simply
closed up shop in that area and returned the patients to traditional
Medicare.

By the late 1990s, private HMOs' selective enrolment of healthy elderly
people and removal of sick people had raised annual Medicare costs by about
$2bn. Yet despite this subsidy, HMOs couldn't effectively compete with
traditional Medicare. The burden of administrative costs‹about 15% in the
largestMedicare HMO compared with 3% in traditional Medicare‹was too great
to overcome. Many HMOs couldn't sustain the extra benefits they had offered
at the outset to attract members.

As enrolment fell, HMOs lobbied hard for government rescue, and Congress
upped their payments. Currently, Medicare pays private plans $77bn annually;
the cost of caring for the eight million Medicare members who have switched
to HMOs is 12% above the cost of caring for comparable patients in
traditional Medicare.

Medicare's HMO contracting programme, originally touted as a market based
strategy to improve the public programme's efficiency, has evolved into a
multibillion dollar subsidy for private HMOs. Moreover, the massive
financial power amassed by these firms (largely at government expense) is a
political roadblock to terminating this failed experiment.

Is private really better?

Other US experiments in using public money to buy care from private firms
have also disappointed. Costs for the private insurance that government
purchases for public employees have risen even faster than Medicare's.
According to comprehensive meta-analyses, investor owned renal dialysis
centres (funded almost entirely by the special Medicare programme that
coverseveryone needing long term dialysis) have 9% higher mortality than
non-profit centres despite equivalent costs; and investor owned
hospitals‹which receive most of their funding from public coffers‹have 2%
higher death rates and 19% higher costs than non-profit hospitals.  Despite
spending less on nurses and other clinical staff, investor owned hospitals
spend more on managers.

If the failings of private contracting in the US are underappreciated, so is
the major success story of recent US health policy: the Veterans Health
Administration system. This network of hospitals and clinics owned and
operated by government was long derided as a US example of failed
Soviet-style central planning. Yet it has recently emerged as a widely
recognised leader in quality improvement and information technology. At
present, the Veterans Health Administration offers more equitable care, of
higher quality, at comparable or lower cost than private sector
alternatives.

Costs of market forces

Health care's shift from a public service to a business model has raised
costs, partly by stimulating the growth of bureaucracy. The proportion of
health funds devoted to administration in the US has risen 50% in the past
30 years and now stands at 31% of total health spending, nearly twice the
proportion inCanada. Meanwhile, administration has been transmogrified from
the servant of medicine to its master, from a handful of support staff
dedicated to facilitating patient care to a vast army preoccupied with
profitability.

Recent trends elsewhere indicate that the US experience is not unique. The
advent of internal markets sharply increased administrative costs in the UK
and New Zealand. The overheads of Canadian private insurers are 10 times
higher than those of public provincial health insurance programmes. In
Australia, tax subsidies for private insurance have directed money through
private firms, whose overhead is 12% (versus 3.5% in the public programme);
the private hospitals favoured by current policies are about10% costlier
than public ones. As Germany's insurance plans have adopted an increasingly
business-like mode of operation, administrative costs have soared, rising
63.3% between 1992 and 2003; meanwhile doctors complain about an avalanche
of paperwork.  

Two factors are at work. Firstly, fragmenting the funding stream, with
multiple payers rather than a single government one, necessarily adds
complexity and redundancy. Secondly, high administrative costs are intrinsic
to the commercial mode (in medical care as elsewhere). Each party to a
business transaction must maintain its own detailed accounting records, not
primarily for coordination but as evidence in case of disputes. Moreover,
investors andregulators demand verification by independent auditors,
generating yet another set of records. Thus the commercial record replicates
each clinical encounter in paper form before, during, and after it takes
place in the examining room. The sense of mutual obligation and shared
mission to which medicine once aspired becomes irrelevant, even a liability.
Hence, the decision to unleash market forces is, among other things, a
decision to divert healthcare dollars to paperwork.

Market failure

Market theorists argue that although competition increases administration,
it should drive down total costs. Why hasn't practice borne out this theory?

Investor owned healthcare firms are not cost minimisers but profit
maximisers. Strategies that bolster profitability often worsen efficiency.
US firms have found that raising revenues by exploiting loopholes or
lobbying politicians is more profitable than improving efficiency or
quality. Columbia/Hospital Corporationof America (HCA)‹the biggest US
private hospital operator‹deliberatelysubmitted inflated bills and expenses
to the government, structured business deals so that Medicare picked up the
cost of corporate expenses, and paid doctors in return for patient
referrals. Tenet, the second largest hospital firm, has a long history of
legal problems. In the 1980s (when the firm was known asNational Medical
Enterprises) it gave doctors kickbacks to boost referrals and improperly
detained psychiatric patients in order to fill beds, resulting in legal
settlements totalling nearly $700m. More recently, Tenet paid hundreds of
millions of dollars in fines to resolve claims that it offered kickbacks for
referrals;claimed excessive sums from Medicare; and that its hospitals
performed hundreds of unnecessary cardiac procedures.

For-profit executives' incomes also drain money from care.
WhenColumbia/HCA's chief executive officer resigned in the face of fraud
investigations into the company, he left with $324m in company stock.
Tenet's chief executive exercised stock options worth $111m shortly before
resigning under pressure from investors in 2003. The head of HealthSouth
(the dominant provider of rehabilitation care, mostly paid for by Medicare)
made $112m in 2002, the year before his indictment for fraud (charges of
which he was lateracquitted) and four years before his conviction on
unrelated bribery charges.

Even chief executives of untainted firms have reaped enormous rewards.
Former Harvard geriatrician John Rowe earned $225 000 a day (including
Sundays and holidays) in his 65 months running Aetna health insurance
company. Bill McGuire made $1.6bn after giving up pulmonary medicine to run
UnitedHealthcare. 

While private contracting has benefited executives and shareholders, it has
increased costs and worsened quality because health care cannot meet the
fundamental requirements for a functioning market. It is fashionable to view
patients as consumers, but seriously ill people (who consume most care)
cannot shop around, reduce demand when suppliers raise prices, or accurately
appraise quality. They necessarily rely on their doctor's advice on which
tests and treatments to "purchase."

Even for sophisticated buyers like government, the "product" of health care
is notoriously difficult to evaluate, particularly since doctors and
hospitals create the data used to evaluate and reward them. When Tenet
hospitals did heart surgery on healthy patients, the surgical outcomes
appeared first rate. Even forhonest firms, careful selection of lucrative
patients and services is the key to success. Conversely, meeting community
needs often threatens profitability and hence institutional survival. In the
past decade 425 emergency departments‹magnets for both very sick and
uninsured patients unable to pay‹have closed. Overcrowded US emergency
departments turn away an ambulance once a minute, on average.

Finally, a real market would require multiple independent sellers, with free
entry into the marketplace. Yet many hospitals exercise virtual monopolies;
half of Americans live in regions too sparsely populated to support real
medical competition.

What's driving privatisation?

Evidence from the US is remarkably consistent; public funding of private
care yields poor results. In practice, public-private competition means that
private firms carve out the profitable niches, leaving a financially
depleted public sector responsible for the unprofitable patients and
services. Based on this experience, only a dunce could believe that market
based reform will improveefficiency or effectiveness. Why do politicians‹who
are anything but stupid‹persist on this track?

Such reforms offer a covert means to redistribute wealth and income in
favour of the affluent and powerful. Privatisation trades the relatively
flat pay scales in government for the much steeper ones in private industry;
the 15-fold pay gradient between the highest and lowest paid workers in the
US governmentgives way to the 2000:1 gradient at Aetna.

But even more important, privatisation of publicly funded health systems
uses the public treasury to create profit opportunities for firms needing
new markets. US private insurers used to focus on selling coverage to
employer sponsored groups and shunned elderly people as uninsurable. Now,
with employers cutting health benefits, insurers have turned to public
treasuries for newrevenues. And why stop at selling insurance? Why not tap
into the trillions spent annually on care in hospitals and doctors' offices?

Lessons for other countries

Market fundamentalists conjure visions of efficient medical markets
partnered with government oversight and funding to assure fairness and
universality. But regulation is overmatched. Incentives for optimal
performance align imperfectly, at best, with the real goals of care.
Matrices intended to link payment to results instead reward entrepreneurs
skilled in clever circumvention. Their financial and political clout grows;
those who guilelesslypursue the arduous work of good patient care lose in
the medical marketplace.

Health systems in every nation need innovation and improvement. But remedies
imported from commerce consistently yield inferior care at inflated prices.
Instead we prescribe adequate dosing of public funds; budgeting on a
community-wide scale to align investment with health priorities and
stimulate cooperation among public health, primary, and hospital care;
encouragementof local innovation; explicit empowerment of patients and their
families; intensive audit for improvement, not reward or blame; a system
based on trust and common purpose; and leadership not by corporations but by
"imaginative, inspired, capable and . . . joyous people, invited to use
their minds and their wills to cooperate in reinventing the system, itself .
. . because of the meaning it adds to the lives and the peace it offers in
their souls." 


Hallmarks of market based reforms
* Market reforms aim to bring medicineinto the realm of commerce, where
commodities (homogeneous goodsor services) are bought and sold for profit
* The first stage of thisprocess is to divide the medical enterprise into
discreet,saleable units (commodities), creating buyers andsellers‹for
example,separating responsibility for financing and providingcare or moving
from global hospital budgets to fixedpayment for a specific procedure
* Once medical commodities aredefined, the sellers (medical providers) are
forced to compete, givingrise to financial winners and losers
* Because most medical commoditiesare heterogeneous (patients differ)
providers can gainadvantage by market segmentation‹for example, caring fora
relatively healthy subgroup of patients with a particular diagnosis
* Profitable providers attract investors andamass the financial (and
political) power to expandtheir opportunities, while unprofitable ones
aredriven from the market


Summary points The US has long combined public funding with private
healthcare management and delivery Extensive research shows that its
for-profit health institutions provide inferior care at inflated prices US
experience shows that market mechanisms undermine medical institutions
unable or unwilling to tailor care to profitability Commercialisation drives
up costs by diverting money to profits and fuelling growth in management and
financial bureaucracy The poor performance of US health care is directly
attributable to reliance on market mechanisms and for-profit firms and
should warn other nations from this path

We thank Howard Waitzkin for useful comments.

Contributors and sources: SW and DUH work as primary care doctors at an
urban public hospital. Stimulated by their patients' difficulties in
obtaining care, they began research into the inadequacies of US healthcare.
In 1986 they cofounded Physicians for a National Health Program
(www.PNHP.org <http://www.PNHP.org/> ), which advocates non-profit national
health insurance in the US. Both authors participated equally in all aspects
of this work, which draws on their research,experience as clinicians in the
US healthcare system, and extensive literature review. Both serve as
guarantors.

Competing interests: None declared.

Provenance and peer review: Not commissioned; externally peer reviewed.
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Related Article
The market has failed

Fiona Godlee
BMJ 2007 335: 0. [Extract]
<http://www.bmj.com/cgi/content/extract/335/7630/0>  [Full Text]
<http://www.bmj.com/cgi/content/full/335/7630/0>

 

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BMJ  2007;335 (1 December), doi:10.1136/bmj.39413.597465.47
Editor's Choice
The market has failed
Fiona Godlee, editor

fgodlee at bmj.com <mailto:fgodlee at bmj.com>

Gordon Brown may be having second thoughts about market reforms in the NHS.
Last week Nick Timmins described how the government is cutting back its use
of the private sector (BMJ 2007;335:1066; doi:10.1136/bmj.39405.462431.94
<http://www.bmj.com/cgi/doi/10.1136/bmj.39405.462431.94> ). Expansion of the
private sector is still the official line, but only as long as it provides
value for money, Mr Brown told this week's conference of the Confederation
of British Industry. Beleaguered as he is on almost every front, if Brown is
rethinking healthcare markets he'll find support in this week's BMJ. Steffie
Woolhandler and David Himmelstein argue that US health care, the biggest
system in the world in which markets have been given full rein, has failed.
Specifically, they point to the toxic mix of public funding (through
Medicare and Medicaid) and private provision, exactly the mix that Tony
Blair envisioned for the UK. Rather than copying the US model, say
Woolhandler and Himmelstein, the UK and the world should put it in
quarantine (doi: 10.1136/bmj.39400.549502.94
<http://www.bmj.com/cgi/doi/10.1136/bmj.39400.549502.94> ).

Why do markets in health care fail to deliver the things we want? The Office
of Health Economics explains that effective markets produce the goods and
services we want in the right quantities at the lowest possible cost
(www.oheschools.org/ohech3pg2.html
<http://www.oheschools.org/ohech3pg2.html> ). They function because they are
able to transmit information about benefits and costs between producers and
consumers. Markets fail when information isn't transferred properly, which
prevents people from making rational decisions about what they are
buying.Markets also fail when the producers have the power to influence
price or quantity. Doctors and other health suppliers often have this power.

At a more fundamental level, even the most perfect healthcare market will
fail to deliver what most of us want: a fair distribution. Markets are
amoral about who consumes what and how much. Markets ration consumption on
the basis of price and consumers' incomes. A true market has no room for
equal access for equal need, the bedrock on which the NHS was built. Even
those who are not hung up on equity for its own sake can see that societies
need a healthy workforce and that public ill health carries threats for the
rich as well as the poor.

Proof of the market's failure in US health care is nowhere more evident,
ironically, than in the fact that 60% of health spending now comes from the
public purse. Woolhandler and Himmelstein explore how this has happened.
They conclude that using public money to buy care from private firms has led
to soaring administrative costs, selective enrolment, corruption, and
profiteering: "Investor owned healthcare firms are not cost minimisers but
profit maximisers.Strategies that bolster profitability often worsen
efficiency. US firms have found that raising revenues by exploiting
loopholes or lobbying politicians is more profitable than improving
efficiency or quality."

Michael Moore's film Sicko (BMJ 2007;334:1338-9;
doi:10.1136/bmj.39258.421111.DB
<http://www.bmj.com/cgi/doi/10.1136/bmj.39258.421111.DB> ) used
controversial documentary techniques to rage against the parlous state of US 
health care. Woolhandler and Himmelstein don't pull their punches and may be 
accused of polemic. But the facts they have marshalled speak for themselves 
and must give Gordon Brown, or any future government, serious pause for 
thought.

Related Articles
UN conference on climate change will test countries' commitment to public 
health

Rory Watson
BMJ 2007 335: 1116-1117. [Extract] 
<http://www.bmj.com/cgi/content/extract/335/7630/1116-a>  [Full Text] 
<http://www.bmj.com/cgi/content/full/335/7630/1116-a> 

Competition in a publicly funded healthcare system

Steffie Woolhandler and David U Himmelstein
BMJ 2007 335: 1126-1129. [Extract] 
<http://www.bmj.com/cgi/content/extract/335/7630/1126>  [Full Text] 
<http://www.bmj.com/cgi/content/full/335/7630/1126> 

Return to the true path?

Nicholas Timmins
BMJ 2007 335: 1066-1067. [Extract] 
<http://www.bmj.com/cgi/content/extract/335/7629/1066>  [Full Text] 
<http://www.bmj.com/cgi/content/full/335/7629/1066> 

US health professionals demonstrate in support of Sicko

New York
BMJ 2007 334: 1338-1339. [Extract] 
<http://www.bmj.com/cgi/content/extract/334/7608/1338>  [Full Text] 
<http://www.bmj.com/cgi/content/full/334/7608/1338> 



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