A Collection of Articles on U.S. Health Care Reform
By Victor R. Fuchs
HEALTH CARE REFORM
2 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
The Robert Wood Johnson Foundation,
helping Americanâ€™s lead healthier lives and
get the care they need. www.rwjf.org
FO R E WO R D | i
Health care reform is likely to be hailed as the single
biggest accomplishment of the first year of President Obamaâ€™s
administrationâ€”at least that is what the political pundits
are saying. But Victor Fuchs has been thinking, writing and
speaking about health policy longer than anyone involved in
the current reform process and his articles show that much
more can and should be done. Victor is the Stanford economics
professor who is the dean of American health economists and
is best known for his thoughtful book Who Shall Live? In just
the past two years he has written 12 short articles that have
appeared in such prestigious publications as the Journal of the
American Medical Association (JAMA), New England Journal
of Medicine and Health Affairs. These 12 articles, combined,
are maybe one-hundredth as long as the bills being voted on
in Congress, but they contain more ideas to bring about true
improvements in the way we allocate health care and steps
that we need to take to control spending on health. They also
have the advantage that they can be comprehended by mere
humans in finite time, unlike the proposed legislation. This
booklet reprints the 12 articles to shed light not only on what
might have been but also on what is left to be done in the
process of health policy reform.
Restructuring health care is far from over. In fact, the
true task of accomplishing universal coverage, putting health
spending on a budget, and reducing economically and medically
wasteful procedures and treatments has hardly been dented.
While implementing all of Victorâ€™s ideas would take years,
some of them can and should be accomplished sooner rather
than later. Health reform is a work in progress and much can
be gained by studying the wisdom of Victor Fuchs.
Just read Victorâ€™s papers. They are short, so summarizing
all of them is unnecessary. Instead, I am going to focus on part
of one of the articles â€œHealth Reform: Getting the Essentials
Right.â€ Victor proposes that serious health policy reform
needs to pay attention to the four Câ€™s (coverage, cost control,
coordinated care and choice). It will probably take several
years to assess what has been accomplished in the legislation
that passes, but my early take on it is that there remains a lot
to be done regarding the four Câ€™s, particularly with respect to
cost control and coordinated care.
Cost control is imperativeâ€”not only for the federal
government but also for state governments and the economy as
a whole. In another of Victorâ€™s articles (â€œThree â€˜Inconvenient
Truthsâ€™ â€), he points out that health spending has grown 2.8
percent per year faster than the rest of the economy for the past
30 years. If we stay on that path and donâ€™t â€œbend the curveâ€ in
the next 20 years, then we will be devoting fully 30 percent
of the GDP on health care by 2030. A huge fraction of all of
the economic growth of the next 20 years will go to health,
and it just gets worse after that. We have to get off this path,
particularly since there is quite a bit of evidence that most of the
extra spending on health care wonâ€™t deliver much in the way
of improved health. But, how should we/can we control health
spending? Victorâ€™s first idea is to end open-ended entitlements
and create a defined budget for government-funded health
programs. This could involve creating a dedicated tax to fund
all of the federal governmentâ€™s health spending. In a way, it is
just common senseâ€”the first step in getting spending under
control is to put the spending on a budget.
The second part of the cost control piece is to set up a
process to evaluate new health technologies and to compare
costs and outcomes. What health return are we getting for the
extra resources consumed by new medical technologies? In most
markets, informed consumers decide whether new technologies
are worth their incremental cost. Furthermore, in order to get
widespread adoption of new technologies, in most markets costs
have to be brought down to a level that promotes high demand.
Medical care is different. The costs are far from transparent;
ii | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
the effectiveness of new treatments is hard to evaluate; and
no one is doing the â€œvalue for moneyâ€ calculation. One of the
primary goals of health policy reform should be cost control.
We havenâ€™t really gotten serious about that yet.
These examples are only a small sample of Victorâ€™s ideas.
He makes the point that cost shifting is not the same as cost
control; he cuts through the haze of incidence of who actually
pays for health insurance today; he clarifies the nature of waste
in health care and describes the difficulty in curtailing it. I
have known Victor for more than 35 years. We are the best
of friends and colleagues. He is a delightful person who has
a penchant for stand-up comedy; at the same time he takes
economic policy seriously. It is not enough to work on hard
problems for Victor. It isnâ€™t enough to get it right in theory. He
admires people who work on important economic problems
and who do so with reference to the appropriate information,
who analyze the data carefully and who conclude with policy
advice. His own career embodies the approach.
Over the last several years, Victor has led a research
program in health policy that he terms â€œFRESH Thinking.â€
Ezekiel Emanuel co-directed the effort until he joined the
Obama administration. The program brought together some
of the brightest minds in the broad field of health policy. The
work was generously supported by The Blue Shield of California
Foundation and by The Robert Wood Johnson Foundation.
Victor wrote the 12 articles of this volume as part of the output
of the FRESH Thinking research program. I participated in
several of the workshops of the FRESH Thinking endeavor
and have agreed to direct a follow-on effort through SIEPR,
called FRESH Thinking 2.0 in the best Silicon Valley
tradition. Victor Fuchs will continue to be involved, this time
as chairman of the groupâ€™s steering committee.
These 12 articles represent the thoughts of the leading
health economist in Americaâ€”on one of the most important
subjects of the next couple of decades.
John B. Shoven
Wallace R. Hawley Director, Stanford Institute for Economic
Policy Research (SIEPR)
Charles R. Schwab Professor of Economics
Director, FRESH (Focused Research on Efficient Secure Health)
ACK N OW LED G M EN T S | iii
In A Streetcar Named Desire, Blanche DuBois said that she
always depended on the kindness of strangers. In my work on
health care I go furtherâ€”I have depended on the kindness
of strangers and friends and have had the pleasure of seeing
the former become the latter. For their assistance with this
collection of reprinted articles on health care reform, I gratefully
acknowledge financial support from The Robert Wood Johnson
Foundation and The Blue Shield of California Foundation. I
also thank Catherine D. DeAngelis, MD, MPH, editor in chief,
and Phil B. Fontanarosa, MD, MBA, executive deputy editor,
The Journal of the American Medical Association; Debra Malina,
PhD, â€œPerspectiveâ€ editor, The New England Journal of Medicine;
and Donald E. Metz, executive editor, Health Affairs, for their
encouragement and advice. My colleagues Ezekiel J. Emanuel,
MD, PhD, and Alan M. Garber, MD, PhD, have generously
shared their knowledge of health care with me, sometimes as
co-authors. For several decades, my understanding of health
economics has been enhanced by frequent interactions with
my Stanford colleagues, Kenneth Arrow and Alain Enthoven.
My longtime assistant, Rossannah Reeves, deserves special
thanks for her patience in helping me work through many
drafts and seeing each through publication. I am grateful to
Michelle Mosman, director of communications, Stanford
Institute for Economic Policy Research, for turning individual
articles into this booklet. Finally, I thank John Shoven for his
gracious â€œForeword,â€ one that would have met my motherâ€™s
Victor R. Fuchs
Henry J. Kaiser Jr. Professor Emeritus
iv | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
H E ALT H C AR E R EFO R M â€“ A CO LLEC T I O N O F AR T I CLE S BY V I C TO R FU CHS | 1
Table of Contents
Eliminating â€œWasteâ€ in Health Care…………………………………………………………………………………………………………………………………………………….. 2
Four Health Care Reforms for 2009…………………………………………………………………………………………………………………………………………………….. 4
Cost Shifting Does Not Reduce the Cost of Health Care…………………………………………………………………………………………………………………. 6
The Proposed Government Health Insurance Company â€” No Substitute for Real Reform……………………………………………………… 9
Reforming US Health Care â€“ Key Considerations for the New Administration……………………………………………………………………………. 12
Health Reform: Getting The Essentials Right……………………………………………………………………………………………………………………………………. 15
Health Care Reform â€” Why So Much Talk and So Little Action?…………………………………………………………………………………………………… 19
Three â€œInconvenient Truthsâ€ about Health Care………………………………………………………………………………………………………………………………. 21
The Perfect Storm of Overutilization …………………………………………………………………………………………………………………………………………………. 25
Who Really Pays for Health Care? The Myth of â€œShared Responsibilityâ€………………………………………………………………………………………. 27
What Are The Prospects For Enduring Comprehensive Health Care Reform?…………………………………………………………………………….. 31
Essential Elements of a Technology and Outcomes Assessment Initiative………………………………………………………………………………….. 33
2 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
President Obama is the most recent in a long line of US
presidents to seek reductions in health care spending through
elimination of â€œwaste.â€ However, the stakes this time are unusually
highâ€”the president has reported that eliminating waste is
needed to fund two-thirds of the approximately $900 billion
needed (over 10 years) for expanded health care coverage.1
achieve this goal requires defining waste, identifying contexts in
which it occurs, determining why it occurs, and implementing
policies that prevent reoccurrence.
Defining waste in medical care is not simple. Consider, for
example, a patient who has experienced frequent, intermittent
headaches for several weeks. Her physician thinks it is unlikely
that the headaches are caused by a brain tumor or lesion (less
than 1 chance in 10). A magnetic resonance imaging scan
would provide more definite information. If the physician orders
the scan, is that waste? What if the chances were 1 in 100 or 1
in 1000? What if the patient is so anxious about the headaches
that she has difficulty with daily functions? Should that affect
the definition of waste? As another example, consider 10
members of a college football team who are found to have a
disease that has 2 possible interventions. Bed rest, fluids, and
over-the-counter medications for relief of symptoms would result
in recovery of all 10 patients in about 2 weeks; administration
of a new, expensive drug would likely cure 7 patients within 2 or
3 days, send 1 patient to the hospital, and have no effect on the
others. Is it wasteful to give the drugâ€”or not to give it?
These examples lead to considering 2 possible definitions
of waste in medical care. Medical waste is defined as any
intervention that has no possible benefit for the patient or in
which the potential risk to the patient is greater than potential
benefit. Economic waste is defined as any intervention for which
the value of expected benefit is less than expected costs. The
proportion of care deemed wasteful using the medical definition
is much smaller than that deemed wasteful using the economic
definition. Medical waste could occur only if the physician is
misinformed, if the patient is misinformed and the physician
succumbs to patient demands, or if the physician behaves
unethically. Economic waste is much more common because
of third-party payment. A conscientious clinician treating an
insured patient would tend to recommend any intervention
with a potential benefit greater than the potential risk.
Two ubiquitous aspects of medical care make identification
of waste particularly problematic. First, there is little certainty
in medicine. Implicitly, if not explicitly, physicians are usually
dealing with probabilities. Many interventions appear to
have been wasteful in retrospect, but that is not the correct
criterion; only prospective probability of success is relevant.
The oft-heard promise â€œwe will find out what works and what
does notâ€ scarcely does justice to the complexity of medical
practice. Some interventions are undoubtedly useless, but
those that might help some patients are much more common.
Second, patients differ in unpredictable ways. The same drug
given to patients with the same diagnosis often has different
effects, ranging from rapid cure to serious adverse reaction.
Any effort to reduce costs on a large scale requires
consideration of economic waste. Where in medical practice is
economic waste likely to be found? Almost everywhere. Some
patients do not receive sufficient screening because of lack of
insurance, inertia, or fear, but for the US population as a whole,
the error is probably on the side of excess screening. On a per
capita basis, patients in the United States receive almost 3
times as many magnetic resonance imaging scans as those in
Canada.2 Are the benefits of extra scans enough to justify the
extra cost? Repeated testing is another area with high potential
for economic waste. There is usually little scientific foundation
for the appropriate interval between tests and even less
economic analysis of benefits and costs of alternative intervals.
For a variety of reasons, including pressure from patients,
Eliminating â€œWasteâ€ in Health Care
By Victor R. Fuchs, PhD
Reprinted with permission from JAMA, December 9, 2009.
ELI M I NAT I N G â€œ WA S T Eâ€ I N H E ALT H C AR E | 3
physicians prescribe brand-name drugs when generic medications
would be as effective or no drug at all would be best. An analogous
situation may be the choice between a high-cost device or procedure
and a less expensive alternative. For example, high-cost drug-eluting
stents may be the better choice for some patients, but others would
do just as well with less expensive bare-metal stents.3,4
Some patients are hospitalized for what might be wasteful
reasons. For example, the patientâ€™s insurance coverage might
be better in hospital, compensation to the physician for dealing
with a complex case on an outpatient basis may be inadequate,
or readmission may occur because of poor coordination between
inpatient and outpatient care or because the discharged patient
lacks social support. Another example is the excess ordering of
tests because of â€œdefensive medicineâ€ practiced out of fear of
litigation for missing a diagnosis.
Identification of waste is difficult, but eliminating it is more
difficult. Every dollar of waste is income to some individual
or organization. Insured patients want all the care that might
do some good; fee-for-service payment to clinicians also can
lead to economic waste.5
The combination of insurance and
fee-for-service can be wasteful because neither the patient nor
the physician has an incentive to consider cost. Some see the
solution in making the patient cost conscious through large
deductibles and co-payments. That may work for high-income
individuals, but the average person who lives from paycheck to
paycheck could not handle the typical medical bill. Moreover,
the average patient in the United States is a poor judge of what
care is needed and the quality of that care. The idea of sick
patients shopping for the lowest-price medical care (the way
they buy automobiles) is a fantasy that will not contribute to
informed elimination of waste. There seems to be no alternative
to relying on physicians to practice more cost-effective care.
There are 3 requirements for physicians to practice cost
effective care. First, physicians need information about
effectiveness and costs; the range of possible diagnostic and
therapeutic interventions available in all but the simplest
cases is staggering. The provision of such information in
a timely and easily accessible form is a public good that
can only be provided by a large, publicly funded but quasi
Second, physicians require access
to an infrastructure that provides specialized technology and
personnel appropriate for cost-effective care, for example, a
multidisciplinary, team approach to the care of patients with
diabetes. Third, information and infrastructure will often be
wasted unless physicians are provided with incentives that
reward cost-effective decisions.
President Obama is correct about possible cost reductions
through elimination of wasteâ€”if the economic definition is what
he has in mind. But the president should not underestimate the
challenge of implementing policies that lead to such elimination.
Author Affiliation: National Bureau of Economic Research, Stanford, California.
Corresponding Author: Victor R. Fuchs, PhD, National Bureau of Economic
Research, 30 Alta Rd, Stanford, CA 94305-8006 ([email protected]).
Financial Disclosures: Dr Fuchs reported receiving financial support for his
research from the Blue Shield of California Foundation and the Robert Wood
Additional Contributions: I also thank Pat A. Basu, MD, MBA (Department
of Radiology, Stanford University School of Medicine), Alan S. Go, MD
(Comprehensive Clinical Research Unit, Kaiser Permanente of Northern
California), and Cynthia Yock, MS (Stanford Health Policy, Stanford University),
for helpful comments. No compensation was given for their contributions.
1. Obama seeks out skeptics at Montana town hall. CNN Web site. http://
August 18, 2009. Accessibility verified November 10, 2009.
2. Medical Imaging in Canada 2007. Canadian Institute for Health
Information Web site. http://secure.cihi.ca/cihiweb/products/MIT_2007_
e.pdf. Accessed October 7, 2009.
3. Bertrand OF, Faurie B, Larose E, et al. Clinical outcomes after multilesion
percutaneous coronary intervention: comparison between exclusive and
selective use of drug-eluting stents. J Invasive Cardiol. 2008;20(3):99-104.
4. Yan BP, Ajani AE, New G, et al; Melbourne Interventional Group
Investigators. Are drug-eluting stents indicated in large coronary
arteries? insights from a multicentre percutaneous coronary intervention
registry. J Cardiol. 2008;130(3):374-379.
5. Emanuel EJ, Fuchs VR. The perfect storm of overutilization. JAMA.
6. Emanuel EJ, Fuchs VF, Garber AM. Essential elements of a technology
and outcomes assessment initiative. JAMA. 2007;298(11):1323-1325.
4 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
Prospects for the enactment of comprehensive, sustainable
health care reform this year look increasingly bleak.
Republican support for President Barack Obamaâ€™s ambitious
agenda is fading fast, if it ever existed. An imaginative, truly
bipartisan approach that moves the system away from employersponsored insurance â€” the Wydenâ€“Bennett plan â€” has
failed to gain any traction. Within the Democratic majority,
sharp disagreements in each house, and between the House
and Senate, do not augur well for coherent legislation, even if
political compromises can be struck.
Disappointment with the reaction of some of the public and
gridlock in Congress might lead to the abandonment of reform
this year. With the need so great, and with so much effort
having been put forth by so many people, that would be a crime.
Almost everyone agrees that the present U.S. health care system
is dysfunctional: it is too costly, too incomplete in coverage, and
too prone to avoidable lapses in quality of care. A true remedy
would require major changes in the financing and organization
of care; such changes currently have little support from either
politicians or the public. But a start must be made.
Although comprehensive change is probably beyond
reach this year, several specific reforms should and could be
enacted: the creation of insurance exchanges, the elimination
or limitation of the tax exemption of employer-sponsored
health insurance, the appointment of an expert commission
to devise changes to the way Medicare pays providers, and the
provision of ensured funding for a quasi independent institute
for technology assessment. Each of these changes alone has
a high probability of doing some good. Taken together, they
reinforce each other and lay a foundation for further reforms.
Insurance exchanges that bring together insurance companies
and potential buyers have lower administrative costs than does a
system in which numerous sellers and buyers of insurance have
to make separate deals. Exchanges are particularly valuable for
individual buyers, for persons who are self-employed, and for small
firms; they would also be an excellent alternative to employer
sponsored insurance. To succeed, the exchanges must attract large
numbers of enrollees â€” healthy persons as well as sick persons â€”
and must have risk-adjustment rules to protect insurance companies
that enroll a disproportionate number of sick beneficiaries.
Insurance exchanges that attract large numbers of
participants benefit from economies of scale, eliminate the
cost of brokers, and can offer a wide choice of insurance
policies. From the point of view of insurance companies, a wellfunctioning exchange is beneficial because it permits them to
add large numbers of customers at a relatively low cost. Alain
Enthoven has pointed out that the Federal Employees Health
Benefits Program is a kind of insurance exchange.1
is not called an insurance exchange, it works similarly to one,
and it functions well for both government employees and the
companies that insure them. The California Public Employeesâ€™
Retirement System (CalPERS) performs a similar function for
employees of Californiaâ€™s state and local governments.
The revelation that top Goldman Sachs executives are given
a tax-free $40,000-per-year health insurance policy highlights
what is arguably the most regressive feature of the entire
federal tax code: the tax exemption of employer contributions
to health insurance premiums. This exemption confers huge
subsidies on high-income Americans and small or no subsidies
on those with low incomes. There are three reasons that the
exemption has this effect: first, the higher a personâ€™s marginal
tax bracket, the larger the subsidy he or she receives; second,
on average, higher-income workers tend to have more generous
insurance policies; and third, the proportion of people who
receive employer-sponsored insurance rises dramatically with
family income, from approximately one in four among those
with incomes under $30,000 to more than four in five among
those with incomes above $75,000.2
Elimination of the subsidy
Four Health Care Reforms for 2009
By Victor R. Fuchs, PhD
Reprinted with permission from the New England Journal of Medicine, October 7, 2009.
FO U R H E ALT H C AR E R EFO R MS FO R 20 0 9 | 5
would not only make the tax system fairer, but it would also
provide more than $200 billion of additional federal revenue
annually. If Congress did nothing else for health care this year,
this reform would accomplish a great deal.
Some observers believe that loss of the tax exemption would
cause a large decrease in employer-sponsored insurance coverage.
No one knows the extent or timing of this effect; it might occur
quickly, or it might occur over the course of several years. Wellfunctioning insurance exchanges would ease the transition
from employer-sponsored insurance; synergistically, the removal
of the tax exemption would spur the growth of exchanges. Thus,
these two reforms would reinforce each other. Sooner or later,
the country must wean itself from employer-sponsored insurance
if it is to achieve universal coverage with equitable and adequate
financing and lower administrative costs.
Most observers are convinced that reform of Medicareâ€™s
payment system for providers is a good place to start in
reducing health care expenditures without jeopardizing the
publicâ€™s health. Not only does Medicare spending account for a
significant portion of total health expenditures (approximately
20%), but changes that are initiated by Medicare are often
adopted subsequently by private insurers. Expert advisors have
recommended useful reforms in the past, but the pressure
that special interest groups place on Congress usually blocks
implementation. The United States needs an independent
commission of physicians and other experts to devise payment
reforms, including realignment of reimbursement rates to
more accurately reflect the value of services, some bundling of
payments to provide an incentive for efficient use of resources,
and new benefit designs. Recommendations should be submitted
for Congressional approval, but they must be adopted or rejected
as a package, rather than picked apart piece by piece. The
latter approach provides maximal opportunity for lobbyists for
special-interest groups to determine the outcome, whereas a
congressional â€œyesâ€ or â€œnoâ€ vote on a total reform package would
allow the public interest to play a larger role.
Congress usually blocks implementation. The United States
needs an independent commission of physicians and other
experts to devise payment reforms, including realignment of
reimbursement rates to more accurately reflect the value of services,
some bundling of payments to provide an incentive for efficient
use of resources, and new benefit designs. Recommendations
should be submitted for Congressional approval, but they must be
adopted or rejected as a package, rather than picked apart piece
by piece. The latter approach provides maximal opportunity for
lobbyists for special-interest groups to determine the outcome,
whereas a congressional â€œyesâ€ or â€œnoâ€ vote on a total reform
package would allow the public interest to play a larger role.
Health care spending has grown 2.7% faster than the rest of
the economy over the past 30 years, primarily as a result of new
Some of the new drugs, tests, and procedures have
contributed to longer, high-quality lives. Many have not. Currently,
there is no institution that has been established with the specific aim
of evaluating the value of new technologies (or of new applications
of older technologies). It is not feasible for individual physicians or
physician groups to carry out the necessary analyses and disseminate
findings throughout the health care community. To accomplish
this task, Congress should create a quasi-independent institute for
technology assessment with steady, ensured funding, such as a fixed
percentage of annual Medicare expenditures.4 The assessments
performed by this institute will initially be particularly valuable
to the expert commission that is charged with making Medicare
payment methods more efficient and more equitable.
One omission from these recommended reforms is a
proposal for dramatically increasing the number of insured
Americans. I favor increased coverage and have advocated
universal coverage, financed by a value-added tax that
is dedicated to funding basic health care for all. To be
sustainable, expanded coverage must be accompanied by
adequate new revenues and by changes in the organization
and delivery of care that will predictably lower costs. The
proposals that are currently being considered for expanding
coverage do not meet that test. Indeed, I believe the proposed
expansion of employment-based insurance (through employer
mandates) and the expansion of income-tested insurance
such as Medicaid (through raising the income threshold for
eligibility) are the wrong way to go. These inefficient and
inequitable methods contribute to our present problems and
must eventually be replaced.
I believe that the four reforms proposed here have more chance
of doing good than harm, will lower rather than increase the deficit,
and will reinforce one another. Given the complexity of health care,
thatâ€™s the most that we can expect until comprehensive change in
the financing and organization of care becomes politically possible.
No potential conflict of interest relevant to this article was reported.
1. Enthoven AC. Building a health marketplace that works. Health Affairs
blog, July 31, 2009. (Accessed September 9, 2009, at http://healthaffairs.
2. Employee Benefits Research Institute estimates from the Current
Population Survey. March 2009 supplement. Washington, DC: Employee
Benefits Research Institute.
3. Pauly MV. Competition and new technology. Health Aff (Millwood)
4. Emanuel EJ, Fuchs VR, Garber AM. Essential elements of a technology
and outcomes assessment initiative. JAMA 2007;298:1323-5.
6 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
Almost every political pronouncement now emphasizes
cost reduction as a central object of health care reform. The
policy recommendations that follow, however, frequently
aim at cost shifting rather than cost reduction. Shifting
has popular appeal while reduction usually requires painful
choices. To see the irrelevance of shifting for cost reduction,
consider the proposal to prohibit health insurance companies
from varying premiums according to enrolleeâ€™s health status.
This obviously reduces premiums for the sick but, not so
obviously, also increases premiums for the healthy. Such a shift
may be desirable on equity grounds but does nothing to reduce
the real cost of care. Also, unless accompanied by a strict
mandate, these shifts may lead to an increase in the uninsured
because some healthy individuals will discontinue their health
insurance coverage in response to higher premiums.
A subsidy is another example of a so-called cut in the cost of
care, but also is just cost shifting. A subsidy reduces the cost for
low-income eligible individuals by shifting the cost to higherincome taxpayers. Again, this may be desirable policy, but it
is not a reduction in real costs. When eligibility for a subsidy
includes those individuals and families with incomes up to
500% of the poverty level (approximately $110 000 for a family
of 4) as in one senate proposal,1
even the shifting of costs is
an illusion. It is impossible to collect enough taxes from those
with incomes of more than $110 000 to subsidize the poor and
the sick and also help the numerous middle and upper middle
income households. The latter will have to pay for their own
health care one way or another. Also misleading is the claim
that government is cutting the cost of care to families and
individuals by requiring employers to provide health insurance
(ie, an employer mandate). Abundant theoretical and empirical
research shows that although employers appear to pay, the
cost is actually passed on to workers through foregone wage
increases or to consumers through higher prices.2
To prescribe policies that would result in cost reduction
instead of cost shifting, it is useful to know why Americans
will spend more than $8000 per person this year for health
care while the next highest spending country (it will probably
be Switzerland) will spend about $5500, and the average
Organization for Economic Co-operation and Development
country will spend less than $4500 per person.3
many explanations for the differentials, some more applicable
when comparing the United States to one country and some
to another. The following generalizations, however, hold on
average for comparisons between the United States and other
Higher Administrative Costs
The United States has a highly complicated inefficient
system for funding health insurance and paying physicians,
hospitals, and other providers of health services that relies
primarily on employment-based insurance and incometested insurance (eg, Medicaid). As long as the United States
has hundreds of insurance companies competing for the
business of millions of individual firms, 50 state bureaucracies
administering complex rules governing subsidies, and hundreds
of thousands of physicians and other clinicians having to bill
for every individual service, US administrative costs will
remain abnormally high.
Higher Ratio of Specialists to
Primary Care Physicians
Specialists are more expensive to train and they make more
use of expensive technologies and procedures. In Canada,
one-half of all physicians are in family or general practice4
in the United States, fewer than one-third are primary care
physicians (even including all pediatricians, all obstetricians/
gynecologists, and one-half of all internists).5
A high ratio
Cost Shifting Does Not Reduce the Cost
of Health Care
By Victor R. Fuchs, PhD
Reprinted with permission from JAMA, September 2, 2009.
COS T SH I F T I N G D O E S N OT R ED U CE T H E COS T O F H E ALT H C AR E | 7
of specialists to primary care physicians might contribute to
better health outcomes in some cases, but a significant overall
effect has not been demonstrated. A decrease in the number
of specialists and an increase in the number of primary care
physicians results in delays and inconvenience for some
patients in obtaining specialty care, but improves access to
primary care and keeps costs down.
More Stand-by Capacity
Related to the higher ratio of specialists to primary care
physicians is the greater investment in the United States in
stand-by capacity. Expensive equipment and personnel are not
used as intensively in the United States; this raises the cost per
use. For example, compared with Canada, the United States
has 4.22 times as many magnetic resonance imaging scanners
per million persons, but performs 2.85 times as many scans. On
average, each Canadian magnetic resonance imaging scanner
accounts for 48% more scans than each US machine.6
Most private and public insurance in the United States is
open-ended (ie, benefits are broadly defined), but there is no
limit set on how much spending can result. An alternative,
pursued in some other countries, is to define a fixed budget
for health care, which clearly has a restraining effect on
More Malpractice Claims
In the United States, more resources are devoted to the
administrative, legal, and judicial costs arising from the
malpractice insurance system. Defensive medicine also takes
its toll. Legal limits on awards and an alternative dispute
resolution system could lower these costs.
Less Social Support for the Poor
The poor usually have more health problems and lower
education. Without adequate social support, it is difficult to
take care of the poor who are sick on an outpatient basis.
The result is a higher rate of hospital utilization, especially
readmission after discharge.
Higher Drug Prices
The United States has been subsidizing the rest of the world
by allowing the drug companies to practice price discrimination
by charging higher prices in the United States than in other
countries for the same drug. It would not be difficult to stop
this practice, but some analysts argue that this would result in
a reduction in drug company research and development.
Higher Physician Incomes
After adjustment for the higher proportion of specialists and
the cost of training, the difference between physician incomes
in the United States and other countries is smaller than first
appears, but relative to other occupations, US physicians still
make more money.7
Reducing fees is an option that Medicare
often tries to exercise, but frequently backs off under political
pressure. Moreover, reducing fees does not necessarily reduce
expenditures because physicians can respond by recommending
more visits and tests.Amore fruitful approach would recognize
that physiciansâ€™ incomes after deducting practice expenses
amount to only approximately 10% of total health expenditures,8
but physiciansâ€™ decisions determine most utilization of care. The
challenge to health reform is to implement systems in which
physicians have the information, infrastructure, and incentive to
practice cost-effective medicine. In such a system, highphysician
income would be of minor importance as long as total spending
was under control.
After considering the reasons health care spending is so
much higher in the United States than in other countries, it
seems that only large-scale reform of the way the country funds
health insurance and organizes and pays for care will make
a substantial, sustainable difference in the level of spending.9
Cost shifting does not solve the problem.
Author Affiliation: Departments of Economics and Health Research and Policy,
Stanford University, Stanford, California.
Corresponding Author: Victor R. Fuchs, PhD, National Bureau of Economic
Research, 30 Alta Rd, Stanford, CA 94305 ([email protected]).
Financial Disclosures: Dr Fuchs reported that he has been directing a project
that is looking at generic issues in health care reform called â€œFRESH-Thinking,â€
which receives financial support from the Blue Shield of California Foundation
and the Robert Wood Johnson Foundation.
1. Connolly C. Kennedy details vision for health care. Washington Post.
June 7, 2009.
2. Emanuel EJ, Fuchs VR. Who really pays for health care? the myth of
â€œshared responsibility.â€ JAMA. 2008;299(9):1057-1059.
3. Organisation for Economic Co-operation and Development (OECD)
StatExtracts. OECD Health Data 2008: Selected Data. http://stats.oecd.
org/index.aspx?DatasetCode=HEALTH. Accessed June 25, 2009.
4. Canadian Institute for Health Information. Canadaâ€™s Health Care
Providers, 2007. http://secure.cihi.ca/cihiweb/products/HCProviders_07_
EN_final.pdf. Accessed July 31, 2009.
5. US Bureau of the Census. Statistical Abstract of the United States, 2009;
USPO, Table 157, p 110. http://www.census.gov/prod/2008pubs/09statab/
health.pdf. Accessed July 29, 2009.
8 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
6. Canadian Institute for Health Information. Medical Imaging in Canada,
pdf. Accessed July 31, 2009.
7. Fujisawa R, Lafortune G. The remuneration of general practitioners
and specialists in 14 OECD countries: what are the factors influencing
variations across countries? OECD Health Working Papers No. 41. http://
www.oecd.org/dataoecd/51/48/41925333.pdf. Accessed July 31, 2009.
8. Centers for Medicare & Medicaid. Historical National Health Expenditure
HealthAccountsHistorical.asp. Accessed July 29, 2009.
9. Emanuel EJ, Fuchs VR. A Comprehensive Cure: Universal Health
Care Vouchers, Discussion Paper 2007-11. Washington, DC: Brookings
T H E PR O P OSED G OV ER N M EN T H E ALT H I NSU R AN CE CO M PAN Y â€“ N O SU BS T I T U T E FO R R E AL R EFO R M | 9
As pressure builds on the White House and Congress
to deliver on their promise of health care reform, the idea
of a government health insurance company to compete
with forprofit and not-for-profit private companies is gaining
political momentum. Advocates claim that this new company
would be more efficient, honest, and successful in forcing lower
reimbursement rates on physicians and hospitals.1
close look at how the present health care system functions,
what its major problems are, and what reforms are needed to
solve them suggests that this new idea is not the answer. The
three major problems of the current U.S. system are that 45
million to 50 million people have no health insurance, the
cost of care is high and rapidly increasing, and there are gross
lapses in the quality of care. There is no reason to think that a
government insurance company would make a significant dent
in any one of these problems, let alone all three. To do that
would require real reform in the financing, organization, and
delivery of care.
The United States currently has a complex combination of
private and public health insurance coverage, including selfinsurance and policies purchased from insurance companies
(see graph). What role might a government insurance company
play in this system? If it sold policies only in the individual market
(which now covers 5.9% of the population, approximately
18 million people), its effect would probably be minimal:
Medicare and Medicaid would not change, and employmentbased insurance would continue to be the primary source of
coverage. If the government company intended to compete
in the employment-based insurance market, it would have to
recognize that the largest source of coverage in the United
States (accounting for 30% of the population) is employers
that selfinsure. The only thing these employers buy from socalled insurance companies is administrative services, which
are in fact the main product that many insurance companies
If the government company also sold administrative
services, is there any reason to think that it would be more
efficient than WellPoint, Aetna, Cigna, UnitedHealth Group,
Blue Cross and Blue Shield Association, and other major
companies that compete vigorously for that business? In the
largest current government health care program, Medicare,
administrative services have always been outsourced to private
Approximately one fourth of the population obtains
coverage through an employer that buys insurance from an
insurance company. But in most cases, the premium that
employer pays is â€œexperience ratedâ€ â€” that is, adjusted every
year on the basis of the previous yearâ€™s utilization. Would a new
government company also experience rate premiums, or would
it â€œcommunity rate,â€ charging the same premium regardless
of an employerâ€™s utilization? If it used community rating, the
government company would lose money rapidly because of
adverse selection: firms with low utilization would opt for selfinsurance or insurance companies that experience rate; those
with high utilization would flock to the government company
for the community rating.
As for the 15% of Americans who are currently uninsured,
approximately three quarters of them are too poor or too sick to
acquire insurance on their own; the other quarter are unwilling
to buy insurance. The first group requires subsidization, which
can be accomplished in a variety of ways, including incometested programs such as Medicaid, single-payer plans such as
Medicare, or a taxfinanced universal-voucher approach. The
government company could also be a vehicle for subsidies, but
it would bring nothing special to the problem. Covering those
who have been unwilling to buy insurance requires some form
of compulsion â€” either an individual mandate or some form of
taxation. A government insurance company is neither necessary
nor sufficient for dealing with this segment of the population.
The Proposed Government Health Insurance
Company â€” No Substitute for Real Reform
By Victor R. Fuchs, PhD
Reprinted with permission from the New England Journal of Medicine, May 28, 2009.
10 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
On the cost front, knowledgeable observers of Medicare
from both inside and outside the program believe that it
could obtain a substantial return on an increased investment
in cracking down on fraud and reducing overuse of services.
The failure to strictly monitor utilization is a result partly of
regulatory and budgetary restrictions on Medicare and partly
of political pressures. Surely a government insurance company
would be handicapped by similar restrictions and pressures. The
other part of the cost problem â€” rapid growth of expenditures
over time â€” is attributable primarily to the adoption of new
technology. Many policy experts believe that the solution is to
create an independent institute for technology assessment.3
government insurance company would not help or hinder such
As for quality of care, improvement can occur in two ways.
First, the level of â€œbest practiceâ€ medicine can be raised by
introducing new drugs, devices, and procedures and improving
the understanding of diseases. Such advances are highly
dependent on basic-science research and clinical research.
The existence of a government insurance company would be
largely irrelevant to the pace of medical progress. There is also
great potential for improving the quality of care by bringing
more of the countryâ€™s actual practice closer to â€œbest practice.â€4
But neither public plans (Medicare and Medicaid) nor private
insurance companies have been able to accomplish this.
Real reform begins by acknowledging that the three major
problems â€” coverage, cost, and quality â€” must be attacked
simultaneously. The United States has ample resources to
provide the entire population with basic coverage for health
care if we accept the necessity of subsidies for the poor and
sick and compulsion for people who are otherwise unwilling to
acquire insurance. Cost control requires fixed budgets for basic
coverage so that expenditures and revenues are in balance, as
well as a payment system for providers that gives incentives
for cost-effective care. It also requires an independent institute
for technology assessment to provide physicians with needed
information and to create a value-conscious environment for
future biomedical innovations. Also, the average quality of
care could be raised appreciably if every patient had access to
an accountable care organization that used electronic health
records effectively, provided coordinated care, and monitored
processes and procedures.5
Supporters of a government health insurance company
often point to Medicare as a model, noting its low overhead
and high beneficiary satisfaction. But a new company would
face a very different situation from that of Medicare, which
has a captive audience and doesnâ€™t have to sell insurance and
administrative services in competition with other companies.
The new company would have to worry about adverse selection,
and it presumably wouldnâ€™t have Medicareâ€™s access to the federal
treasury to cover deficits. Moreover, Medicare, despite its assured
market and huge buying power, is headed for insolvency; thus, it
is a poor model for a new program that would be dependent on
voluntary enrollment in a competitive marketplace.
Simply adding a government insurance company to the
present mix would not result in universal coverage, bring costs
Health Insurance Coverage (%)
Medicare Medicaid Individual
Sources of Health Insurance Coverage for the U.S. Population, 2007.
The sum of the percentages exceeds 100% because some persons have insurance from more than one source. â€œOtherâ€ includes special programs for
military retirees, military families, and disabled veterans. Data are from the Employee Benefit Research Institute (www.ebri.org/pdf/FFE114.11Feb09.Final.
pdf) and the Statistical Abstract of the United States, 2009 (www.census.gov/compendia/statab).
T H E PR O P OSED G OV ER N M EN T H E ALT H I NSU R AN CE CO M PAN Y â€“ N O SU BS T I T U T E FO R R E AL R EFO R M | 11
under control, or materially improve the quality of care. Real
reform requires replacing our inefficient, inequitable financing
system with a simple, straightforward approach that subsidizes
the poor and the sick and requires everyone to pay their
fair share. It also requires changes in the organization and
delivery of care that provide physicians with the information,
infrastructure, and incentives they need to improve quality
and control costs. A government insurance company is no
substitute for real reform.
No potential conflict of interest relevant to this article was reported.
Dr. Fuchs is a professor emeritus of economics at Stanford University, Stanford,
1. A public plan for health insurance? New York Times. April 7,
2. Robinson JC. Consumer-directed health insurance: the next generation.
Interview with John Rowe. Health Aff (Millwood) 2005;Suppl
Web Exclusives:W5-583â€“W5-590. (Accessed May 7, 2009, at http://
3. Emanuel EJ, Fuchs VR, Garber AM. Essential elements of a technology
and outcomes assessment initiative. JAMA 2007;298:1323-5.
4. Kohn L, Corrigan J, Donaldson M, eds. To err is human: building a safer
health system. Washington, DC: National Academy Press, 2000.
5. Shortell SM, Casalino LP. Health care reform requires accountable care
systems. JAMA 2008;300:95-7.
12 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
The election of President Barack Obama has set in motion
high expectations that he will undertake systematic reform of
the US health care system in his first term. Such reform must
address 3 persistent problems: the uninsured, the high and
rapidly increasing cost of care, and significant lapses in quality.
Having studied these problems for more than 40 years, I would
like to share in this Commentary some conclusions about
reforming health care in the United States. Before suggesting
what should and should not be done, however, it is important to
learn from the failure of the proposed health reform in 1993.
Sixteen years ago a bright, young, charismatic Democratic
politician entered the White House with a high priority of
reforming US health care. The First Lady, Hillary Clinton,
led the effort; a 500-person task force worked on the plan for
more than a year; and Democrats controlled both houses of
Congress. Nevertheless, the Clinton plan never reached either
house for a vote. What went wrong?
Articles and books dissecting the Clinton planâ€™s failure are
enough to fill a small library.1-3 Their discussions of political
missteps, design complexity, and misleading arguments by
opponents are instructive. They do not, however, get to the
heart of the matter. Although public opinion polls reported
clear majorities in favor of health care reform, support for
substantial change was weak and divided. In an article directed
to then President Clinton in April 1993, I pointed out that
â€œ[m]ost Americans have health insurance. Most Americans
are satisfied with their doctor. . . .â€4(p678) More generally,
numerous individuals and organizations preferred the status
quo, and the political system gave them many opportunities
to block change. Most critics of US health care incorrectly
focused on â€œgreedyâ€ drug companies and â€œoverpaidâ€ physicians
rather than on systemic problems in funding, organization, and
delivery of care. Most workers mistakenly thought that their
insurance was a gift from their employer rather than an offset
to higher wages. The Clintons never rose to the challenge of
explaining these problems to the public.
Most importantly, the Clintons were not alone in failing
to achieve reform. The experienced and influential Rep Pete
Stark (D, California) submitted a bill calling for greater reliance
on government than the Clinton plan. Rep Jim Cooper (D,
Tennessee) put together a bipartisan group of 80 representatives
in support of a more market-friendly plan, and Senators Breaux
(D, Louisiana) and Durenberger (R, Minnesota) authored a
similar bill in the Senate. Significantly, no reform plan was
ever reported out of committee. Weak, divided, uninformed
public support combined with failure of reformers to unite
behind a single plan doomed the effort.
What is different this time around? Not so much. Public
opinion polls in 2008 show support for health care reform at
levels somewhat below those in 1992.5
of the problems still misses the mark; this time insurance
companies are now the favorite villains. Few critics realize that
insurance companies are usually only providing administrative
services. Employers are typically self-insured, and most workers
still do not understand the connection between insurance
and wages. The major problems are as great or greater now
than they were in 1993, but individuals and organizations
who like the status quo are also still numerous. Furthermore,
the inability of reformers to unite behind a single approach
remains a major obstacle.
The biggest difference is the economic climate. In 1993, the
economy was on the rise after a mild recession in 1991. Now
the economy is headed downward. The recession that began in
December 2007 shows no sign of ending and may turn out to be
the worst since the 1930s. Advisors to the president will probably
differ on how the overall economy affects the prospects for health
care reform. Some will say that declines in employment and
employment-based insurance strengthen the pressure for bold new
Reforming US Health Care
Key Considerations for the New Administration
By Victor R. Fuchs, PhD
Reprinted with permission from JAMA, March 4, 2009.
R EFO R M I N G U. S . H E ALT H C AR E â€” K E Y CO NSI D ER AT I O NS FO R T H E N E W AD M I N IS T R AT I O N | 13
approaches to coverage. Others will argue that because the federal
government already faces a large and increasing budget deficit,
this is not an opportune time to increase government spending
on health insurance. These conflicting views can be reconciled
if reform addresses coverage and cost issues simultaneously. The
need to control costs strengthens the case for universal coverage
instead of targeting particular groups. Anincremental strategy
may have a shortrun political payoff, but as long as millions are
uninsured, poverty health clinics and public hospitals will still be
needed. Also, uncompensated care by physicians and hospitals
will still be inefficient and inequitable. Universal coverage creates
opportunities for significant improvements in the organization
and delivery of care.
What about reducing cost? There is a great deal of waste,
fraud, and abuse in the present health care system, but there
also was a great deal of waste, fraud, and abuse in the system
40 years ago. There is no evidence that these issues account for
a larger share of spending today than they did thenâ€”or that
they will be any easier to eliminate. Every dollar of waste, fraud,
and abuse is a dollar of income to someone in the system. Lord
Actonâ€™s famous aphorism, â€œPower tends to corrupt; absolute
power corrupts absolutely,â€ can be paraphrased: absolute cuts
in spending will be resisted absolutely.
The best chance for a sizable one-time reduction in the
level of costs is through a reduction in administrative expenses.
Employment-based insurance and income-tested insurance
(eg, Medicaid) both require costly administration. Universal
coverage, funded in a straightforward manner, would result
in administrative savings large enough to pay for most of the
additional utilization by those previously uninsured.6
One-time savings are welcome, but the most important
goal should be to slow the growth of health care expenditures.
To that end, an independent institute for technology and
outcomes assessment is warranted.7,8 Physicians and hospital
administrators need reliable information about the cost
effectiveness of alternative interventions. Such information,
especially when combined with appropriate incentives and easy
access to supporting technology and nonphysician personnel,
can slow the growth of health care spending.
Another important tool to slow spending growth is to
discontinue open-ended funding. This method of finance,
which characterizes most public and private insurance today,
contributes to the rapid escalation of expenditures. Fixed
budgets have much the same effect as Samuel Johnsonâ€™s
observation: â€œwhen a man knows he is to be hanged in a
fortnight it concentrates his mind wonderfully.â€9
Apart from reduced administrative costs, there should
be no rosy promises of lowering costs from other popular
recommendations. For example, some argue that more
preventive medical care such as screening and testing will
reduce expenditures. While such interventions may contribute
to better health outcomes, they usually increase total health
expenditures.10 A review of 599 articles on preventive
interventions published between 2000 and 2005 concluded,
â€œAlthough some preventive measures do save money, the vast
majority . . . do not.â€11(p,662-663) Widespread use of electronic
medical records reduces costs and improves quality of
care when introduced in appropriate settings such as the
Veterans Affairs hospitals and other coordinated health care
organizations. But requiring or subsidizing electronic medical
records in the present fragmented system will not have the
same effect. For example, Leonard Schaeffer, former chairman
of WellPoint, wrote that his company gave away $42 million
worth of hardware and software to doctors with little success
because â€œit doesnâ€™t add value to them personally.â€12
There should also be caution in adopting a seemingly
innocuous plan to include uninsured 55- to 64-year-olds in
Medicare at a fair premium. Because enrollment will be voluntary,
it would attract a disproportionate number of less healthy
individuals. The resulting deficit would bring unwarranted
disrepute to all plans for public funding of insurance, including
those not subject to selective enrollment.
Going forward, several essential points must be kept in
mind. First, there is no quick or easy fix. A sustainable reform
package will probably take several years to put together,
to muster public understanding, and to gain the necessary
political support. Second, because the problems of coverage,
cost, and quality are interrelated, the reforms must reinforce
one another. Third, the goal of seeking wide support for reform
is commendable, but there should be no settling for appearance
over substance. Any reform plan not controversial is certain to
Fourth, several short- and intermediate-term actions
and initiations can help lay the groundwork for long-term
sustainable reform. Examples include capping or eliminating
the tax-exemption of employer contributions to health
insurance, developing demonstration projects by Medicare
for payment alternatives to current fee-for-service methods,
and creating an institute for technology assessment.
Finally, and most importantly, the importance of
comprehensive, sustainable reform of health care should not
be underestimated. The long-run fiscal stability of the country
depends on it. But the experience of 1993 shows the difficulty
of achieving such reform. It will take skill, determination, and
exceptional leadershipâ€”the very qualities President Obama
demonstrated in reaching the White House.
14 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
Author Affiliation: Departments of Economics and Health Research and Policy,
Stanford University, Stanford, California.
Corresponding Author: Victor R. Fuchs, PhD, National Bureau of Economic Research, 30 Alta Rd, Stanford, CA 94305 ([email protected]).
Financial Disclosure: Dr Fuchs reports receiving support from the Blue Shield of
California Foundation and The Robert Wood Johnson Foundation.
Additional Contributions: I thank Alain Enthoven, PhD, Stanford University,
Stanford, California, for his helpful comments on the manuscript, for which he
received no compensation.
1. Johnson H, Broder DS. The System: The American Way of Politics at the
Breaking Point. Boston, MA: Little Brown & Co; 1996.
2. Skocpol T. Boomerang: Health Care Reform and the Turn Against
Government. New York, NY: WW Norton & Co; 1997.
3. Rushefsky ME, Patel K. Politics, Power and Policy Making: The Case of
Health Care Reform in 1990s. Armonk, NY: ME Sharpe Inc; 1998.
4. Fuchs VR. Dear President Clinton. JAMA. 1993;269(13): 1678-1679.
5. Blendon RJ, Altman DE, Benson JM, et al. Voters and health reform in
the 2008 presidential election. N Engl J Med. 2008;359(19):2050-2061.
6. Emanuel EJ, Fuchs VR. A comprehensive cure: universal health care
vouchers. Washington, DC: The Brookings Institution; July 2007.
Hamilton Project discussion paper 2007-11. http://www.brookings.edu/
papers/2007/07useconomics_emanuel.aspx. Accessed January 30.
7. Emanuel EJ, Garber AM, Fuchs VR. Essential elements of a technology
and outcomes assessment initiative. JAMA. 2007;298(11):1323-1325.
8. Orszag P. The high price of the lack of evidence. In: Evidence-Based
Medicine and the Changing Nature of Health Care: 2007 IOM Annual
Meeting Summary. Washington, DC: National Academy Press;2008.
9. Boswell J. The Life of Samuel Johnson. Vol 3. 2nd rev ed. Powell LF, ed, of
Hill GB, ed. Oxford, England: Clarendon Press; 1934â€“1964:167.
10. Russell LB. Preventing chronic disease: an important investment, but
donâ€™t count on cost savings. Health Aff (Millwood). 2009;28(1):42-45.
11. Cohen JT, Neumann PJ, Weinstein MC. Does preventive care save
money? health economics and the presidential candidates. N Engl J Med.
12. Schaeffer LD. Leading the way: a conversation with HHS Secretary Mike
Leavitt. Health Aff. 2008;27(1):w52-w59. doi:10.1377/hlthaff.27.1.w52.
H E ALT H R EFO R M : G E T T I N G T H E E SSEN T IAL S R I G H T | 15
ABSTRACT: As the ninety-year history and failure of health
care reform illustrates, it is easy for policymakers to disagree
about the details of any new plan. In this Perspective, the
author suggests trying a new approach this time: enacting
a plan that encompasses four essential principles and then
making midcourse adjustments later to get the details right.
He defines the essentials as the Four Cs: coverage, cost
control, coordinated care, and choice. [Health Affairs 28, no.
2 (2009): w180â€“w183 (published online 16 January 2009;
A common phrase states that â€œthe devil is in the details.â€
Many groups claiming to support health reform use this
phrase when they wish to conceal opposition to substantive
changeâ€”or establish their expertise in some small facet of
reform. Doubtless, details are important. But as the debate
proceeds, Congress and the incoming Obama administration
must remember that â€œGod is in the essentials.â€ Without
the essentials, no reform plan can succeed. What are the
essentials? They are coverage, cost control, coordinated care,
and choiceâ€”the â€œFour Cs.â€
The Four Cs
Coverage. First, truly universal coverageâ€”100 percent of
Americansâ€”is essential. Pressure will intensify to settle for
increasing coverage for one group or another. â€œCutting the
number of uninsured people by halfâ€ will be hailed as a great
victory for reform. But leaving millions of Americans without
coverage is not only unfair, it is also inefficient. The remaining
uninsured people will still get some care, albeit haphazard
and uncoordinated, and their care will still be paid for by the
insured or providers.
Furthermore, Americans left out of the insurance pool are
likely to belong to two groups: low-wage workers and healthy
people in their twenties. It is unfair to leave out of the social
compact Americans who work hard and pay taxes. Young,
healthy Americans should not become habituated to being free
riders. To demand that insurance companies guarantee issue
and not exclude pre-existing conditions requires that everyone
be in the insurance poolâ€”including the young and healthy,
who are cheap to cover. Universal coverage can actually result
in lower total spending because it can eliminate the high
administrative costs that are now necessary to determine
who is eligible for coverage and who isnâ€™t. Also, universal
coverage facilitates the possibility of cost-saving changes in
the organization and delivery of care.
Cost control. Politically, cost control is necessary because
insured Americans will be more likely to support reform if
it moderates the burdensome growth in their premiums and
deductibles. It is also necessary because, as the Massachusetts
experiment seems to be demonstrating, failure to control costs
makes coverage gains unsustainable.
Coordinated care. Coordinated care is essential
for both improvement in quality and elimination of
unnecessary costs. Coordination requires some reform
in how physicians, hospitals, and the entire health care
system get paid and deliver care. This is especially true
for management of chronic illnesses, which account for
75 percent of all health care spending.1
produces wins in two areas: quality and cost. It can
curb the excessive use of expensive high-technology
interventions that are used inappropriately to produce
little or no health improvement. Coordination that
improves care for diabetes, congestive heart failure,
emphysema, and other chronic conditions also can reduce
or eliminate avoidable hospitalizations.
Health Reform: Getting The Essentials Right
By addressing the essentialsâ€”coverage, cost control, coordinated care, and choiceâ€”policymakers can
take important first steps toward health system reform, with details to be worked out along the way.
By Victor R. Fuchs
Reprinted with permission from Health Affairs. January, 2009.
16 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
Choice. Finally, choice is a fundamental American value,
and choice of insurance plans as well as networks of physicians
and hospitals is essential for successful reform. Perceived
restrictions on patient choice were used effectively in the
â€œHarry and Louiseâ€ ads of the 1990s to help rally opposition
to the Clinton reform proposal. Furthermore, for the many
Americans who now have no choice of plans or providers,
expanding choice could be an incentive to support reform.
How To Achieve The Goals
When we think of reform, we must think of what Congress
can embody in legislation. But laws canâ€™t always mandate
that these objectives will be achieved. For instance, Congress
cannot mandate that physicians coordinate care with hospitals
and other providers. Legislation can, however, change the
incentives, infrastructure, and information systems to move
providers toward greater coordination.
Letâ€™s examine how the Four Cs should be dealt with, one
Coverage. There are two reasons why people donâ€™t have
health insurance: They are unable to acquire it, or they are
unwilling to do so. The first group (about three-quarters of all
uninsured people) are too poor or too sick to get insurance
without financial assistance.2
The unwilling include young,
healthy people who think they can do without coverage and
others who â€œride freeâ€ in the expectation that if they run up
large medical bills, the system will take care of them.
The essentials for universal coverage, therefore, are
subsidies for those who cannot acquire insurance on their own
and requirements for those who are unwilling to do so. There
are several methods for achieving these goals. For example, a
combination of individual and employer mandates combined
with generous subsidies will come close, as the Massachusetts
plan is demonstrating. A single-payer â€œMedicare for Allâ€
approach will also do it, as demonstrated by the current
Medicare program for those age sixty-five and older. And a
universal voucher approach leaving people free to choose
among competing health plans will also work, as demonstrated
by the current Dutch and Israeli health care systems. Selecting
among these methods should be based primarily on their
ability to control costs and improve coordination of care.
Cost control. There is no single â€œmagic bulletâ€ for cost
control. Multiple forces will have to pull in the same direction
to restrain cost increases.
Entitlements and budgets. One of the essential means is
to eliminate open-ended entitlements and create a defined
budget for government-funded health programs. Such a budget
will provide a strong incentive for insurers and health care
providers to focus on high-value interventions and redesign
delivery systems to improve efficiency and quality.
Technology/outcomes assessment. According to multiple
studies, including most recently those of the Congressional
Budget Office, development and diffusion of new technologies
drive increases in medical care costs.3
There is growing
agreement that the nation needs some kind of comparative
assessment process and increasing likelihood that this will
soon be enacted. Such assessments are essential to inform both
coverage decisions by health plans and treatment decisions by
physicians. Most importantly, these assessments will signal drug
and device manufacturers and procedure-oriented providers
that interventions will be evaluated for coverage and payment
based on effectiveness and cost. Today, pharmaceutical and
other companies can charge top dollar for interventions that
offer few improvements in quality of life and little additional
Of equal importance is systematic outcomes assessment.
Technology assessments typically rely on data from clinical
trials with highly selected patients, but they cannot give an
accurate picture on how tests and treatments work in â€œreal
life,â€ where they are used in combination with other tests
and treatments for patients with multiple chronic conditions.
A health information superhighway is an essential piece of
outcomes assessment, and it seems to be part of President-elect
Obamaâ€™s recovery plan. This infrastructure should be deployed
in conjunction with a plan for the systematic collection of
data. Combining information from medical records with
information on drug usage, laboratory results, and payments
can create a â€œreal-timeâ€ national database on patient outcomes,
the use of services, costs, and the use of technologies in the
â€œreal world.â€ This database should be open to all researchers
who promise to publicly disseminate their methods and results.
The data would facilitate pay-for-performance (P4P) and other
methods for holding both insurers and providers accountable
for the quality, cost, and efficiency of care.
Payment reform. We know the worst way to pay health care
providers: fee-for-service. That is what we mostly do today.We do
not know the best way to pay. And there probably is not a single
best way. Hence, we need experimentation and innovation in
payment, whether more P4P with bonuses for good performance,
bundled payments, or partial or full capitation. To control costs,
it is essential that payers have the freedom to experiment in
rewarding value rather than volume.
Competition. If insurers have to provide a standard benefit
package with guaranteed issue and no pre-existing disease
exclusions, receive risk-adjusted premiums, and have their
outcomes monitored, they will have a strong incentive to
H E ALT H R EFO R M : G E T T I N G T H E E SSEN T IAL S R I G H T | 17
change their business model from excluding sick patients to
actually managing care for efficiency and value. This is how
competition can work to control costs.
Sensitivity to cost and value. One way to make the public
more sensitive to the cost and value of medical services is for
people who want more services of small marginal value to
pay with their own after-tax dollars for coverage that is above
the standard benefit package. For example, wider selection of
physicians or hospitals should require a supplemental fee. A
complementary approach is using value-based insurance so that
patients face higher copayments for more expensive services
when cheaper interventions are just as effective, or when the
indications for the tests or treatments are more tenuous.
There is no guarantee that these measures working
together will restrain costs, but they have a better chance than
any other approachâ€”especially efforts to simply lower unit
reimbursement to providers.
Coordinated care. The health care system is a fragmented,
nineteenth-century cottage industry in which fee-for-service
payment inhibits coordination. Payment reform that rewards
coordination and patient outcomes should improve care.
Similarly, a national database for outcomes assessment would
provide data to rapidly refine guidelines and transform them
into physician reminders and templates for ordering tests and
treatments. Such a database would also help identify which
providers are achieving good patient outcomes and how they
are doing it.
Perhaps most important, legal and regulatory reform is
essential. There are a myriad of laws that inhibit the financial
and administrative relationships among providers that are
essential to clinical coordination. For instance, â€œStark IIâ€
self-referral prohibitions and the federal antikickback laws
are meant to ensure that patient care decisions are based on
medical need, not providersâ€™ financial interest. These rules
are overly broad. While prohibiting self-enrichment, they also
inhibit using financial incentives to facilitate the collaboration
between physicians and other medical providers that improves
coordinated care for patients with chronic conditions.
They need to be amended, and safe harbors more uniformly
defined, to permit closer financial, administrative, and clinical
relationships between physicians and hospitals. As suggested by
Timothy Jost and Ezekiel Emanuel, establishing a Commission
for Innovation in Delivery Systems in the federal government
to provide rapid â€œonestopâ€ review and authorization of
proposals for new payment and delivery system arrangements
could facilitate essential innovation.4 Antitrust and tax laws
also need reform to permit combinations that facilitate the
coordination of care.
Obviously, there needs to be oversight to ensure that these
links improve the quality of care, rather than merely serving
as a cover for provider enrichment. Similarly, reform of scopeof-practice laws is essential to permit the more-flexible use of
advanced practice nurses and other health care professionals,
especially in the primary care setting.
Many providers also want tort reform. Although that would
probably not have a significant impact on health care delivery
or cost control, it is highly desired by physicians and would be
helpful in securing their support for a far broader reform plan.
Choice. Choice is a desirable feature of any reform proposal.
The public values choice as a good thing in itself because it
confers a sense of power and control. Also, choice is essential
to control costs through competition. But too much choice
can be counterproductive in health. If the range of choice in
insurance is unlimited, insurance companies can manipulate
differences in an attempt to cherry-pick. To maintain equity
and avoid adverse selection, some limits on choice are
necessary. With regard to the organization and delivery of care,
some restrictions on choice may be necessary in the interest of
quality and cost. For example, â€œany willing providerâ€ laws can
inhibit the formation of efficient medical groups.
Anything that substantially changes 16 percent of U.S.
gross domestic product will necessarily be complex. It is easy to
disagree about the details of any plan. Failure because of such
disagreements is always the easiest course, as the ninety-year
history of health reform has demonstrated. But policymakers
should keep the focus on the essential objectives and means.
They must recognize also that reform of anything as complex
as health care will not be perfect the first time. Unintended
consequences will occur, and intended consequences will fail.
Enactment of the essentials with a flexible framework that
permits easy midcourse corrections and adjustments can, by
successive approximation, get the details right.
Victor Fuchs ([email protected]) is the Henry J. Kaiser Jr. Professor Emeritus
at Stanford University in Stanford, California, and a research associate at the
National Bureau of Economic Research.
The author acknowledges the substantial contribution of Ezekiel Emanuel in
writing this Perspective.
18 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
1. Centers for Disease Control and Prevention, â€œChronic Disease
Prevention and Health Promotionâ€”Chronic Disease Overview,â€ 20
November 2008, http://www.cdc.gov/nccdphp/overview.htm (accessed 6
2. P. Fronstin, â€œSources of Health Insurance and Characteristics of
the Uninsured: Analysis of the March 2008 Current Population Survey,â€
EBRI Issue Brief no. 321, September 2008, http://www.ebri.org/pdf/
briefspdf/EBRI_IB_09a-2008.pdf (accessed 6 January 2009).
3. See, for example, Congressional Budget Office, â€œTechnological Change
and the Growth of Health Care Spending,â€ January 2008, http://www.
cbo.gov/ftpdocs/89xx/doc8947/01-31-TechHealth.pdf (accessed 6 January 2009); and Peter Orszag, CBO, â€œThe Long-Term Budget Outlook and
Options for Slowing the Growth of Health Care Costs,â€ Testimony before the Senate Finance Committee, 17 June 2008, http://www.cbo.gov/
ftpdocs/93xx/doc9385/06-17-LTBO_Testimony.pdf (accessed 6 January
4. T. S. Jost and E. J. Emanuel, â€œLegal Reforms Necessary to Promote Delivery
System Innovation,â€ Journal of the American Medical Association 299, no.
21 (2008): 2561â€“2563.
H E ALT H C AR E R EFO R M â€” W H Y S O MU CH TALK AN D S O LI T T LE AC T I O N ? | 19
As promised during his campaign, and under pressure
from many quarters, President elect Barack Obama may seek
badly needed changes in the way the United States finances
and delivers health care. Responding to public interest and
perceived need, several previous presidents have attempted to
enact some kind of national health insurance: Harry Truman
in the 1940s, Richard Nixon in the 1970s, and most recently
Bill Clinton in the 1990s. These attempts went nowhere. In
pursuing comprehensive health care reform, President-elect
Obama should be aware of four major reasons why, in the past,
we heard so much talk and saw so little action.
First, many organizations and individuals prefer the status
quo. This category includes health insurance companies;
manufacturers of drugs, medical devices, and medical equipment;
companies that employ mostly young, healthy workers and
therefore have lower health care costs than they would if
required to help subsidize care for the poor and the sick; high
income employees, whose health insurance is heavily subsidized
through a tax exemption for the portion of their compensation
spent on health insurance; business leaders and others who are
ideologically opposed to a larger role of government; highly paid
physicians in some surgical and medical specialties; and workers
who mistakenly believe that their employment-based insurance
is a gift from their employer rather than an offset to their
potential take-home pay. These individuals and organizations
do not account for a majority of voters, but they probably have
disproportionate influence on public policy, especially when
their task is simply to block change.
Second, as NiccolÃ³ Machiavelli presciently wrote in 1513,
â€œThere is nothing more difficult to manage, more dubious to
accomplish, nor more doubtful of success â€¦ than to initiate
a new order of things. The reformer has enemies in all those
who profit from the old order and only lukewarm defenders in
all those who would profit from the new order.â€ This keenly
observed dynamic, known as the â€œLaw of Reform,â€ suggests that
a determined and concentrated minority fighting to preserve
the status quo has a considerable advantage over a more
diffuse majority who favor reform but have varying degrees of
willingness to fight for a promised but uncertain benefit.
Third, our countryâ€™s political system renders Machiavelliâ€™s
Law of Reform particularly relevant in the United States,
where many potential â€œchoke pointsâ€ offer opportunities to
stifle change. The problem starts in the primary elections in
so-called safe congressional districts, where special-interest
money can exert a great deal of influence because of low voter
turnout. The fact that Congress has two houses increases
the difficulty of passing complex legislation, especially when
several committees may claim jurisdiction over portions of a
bill. Also, a super majority of 60% may be needed to force a
vote in the filibuster-prone Senate.
Fourth, reformers have failed to unite behind a single
approach. Disagreement among reformers has been a major
obstacle to substantial reform since early in the last century.
According to historian Daniel Hirshfield, â€œSome saw health
insurance primarily as an educational and public health
measure, while others argued that it was an economic device to
precipitate a needed reorganization of medical practice â€¦ Some
saw it as a device to save money for all concerned, while others
felt sure that it would increase expenditures significantly.â€1
These differences in objectives persist to this day.
Currently, many health care reformers favor an approach
based on comprehensive mandates and generous subsidies. This
approach would leave in place employment based insurance and
income-tested insurance, such as Medicaid, attempting to shore
up these systems rather than replace them with a more unified
method of financing care. Other reformers favor â€œMedicare for
all,â€ an approach that is often referred to as â€œsingle payer.â€ Still
others want to combine the single-payer approach with choice
Reprinted with permission from the New England Journal of Medicine. January, 2009.
Health Care Reform â€” Why So Much Talk and
So Little Action?
By Victor R. Fuchs, Ph.D.
20 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
and competition through a system of universal vouchers for
enrollment in competing health plans that take responsibility
for the care and costs of their enrollees. These approaches, and
others that have been proposed, vary in their objectives and
in the methods they would use to achieve those objectives.
Differences among approaches are not easily reconciled,
because they reflect differences in values and analyses. Even if
a substantial majority of the public and legislators favors some
kind of reform, we will continue to witness much talk and little
action unless they can unite behind a single approach.
This type of review of the obstacles to health care reform
is of more than theoretical or historical interest. It could help
the Obama administration find a successful path to reform.
Consider the groups that seem to prefer the status quo. They
may not be as unified as they first appear. Some individuals
and organizations might realize that they could benefit from
changes in the health care system. For example, some of
the large health care insurers or managers, such as Anthem,
UnitedHealth, and Aetna, would flourish in a system where
relatively few competing health plans are equipped to assume
responsibility for large numbers of enrollees in return for riskadjusted capitation payments. Reformers need to try to secure
their support or, at a minimum, to blunt their opposition.
Similarly, though some physicians would probably see their
income fall under comprehensive reform, others might see an
increase, and all would probably prefer a system in which no
one is uninsured. Even in the pharmaceutical industry, where
opposition to reform is traditionally strong, some firms are
beginning to embrace a goal of high-value innovation; such
companies would move to the head of the industry under a
well-designed new system.
Under the best of circumstances, however, a major Obama
reform initiative will still face strong defenders of the status
quo. Machiavelliâ€™s Law of Reform highlights the importance
of galvanizing those who favor reform into a more vigorous,
aggressive source of political pressure. The success of Obamaâ€™s
campaign team in involving millions of supporters through
the Internet points the way toward such an outcome. The U.S.
political system will still have its numerous choke points, but
skill and determination on the part of leaders in the executive
and legislative branches may prevail, especially if high
unemployment, a financial squeeze on Medicaid, an influenza
pandemic, or some other crisis increases the political dangers
for legislators who oppose reform.
One argument against comprehensive reform that is sure
to surface is that it is not politically feasible. That may well
be true, for the reasons mentioned above. But U.S. history is
studded with major policy changes that were not politically
feasible â€” until they were. Examples include the emancipation
of slaves, the creation of a strong and independent central
bank, the establishment of Social Security, the fluctuation
of foreign exchange rates, and most recently, more than $1
trillion devoted to bailing out large financial institutions. Six
months ago, a bailout of this nature and size was not even close
to being politically feasible. Comprehensive health care reform
must happen, if for no other reason than to avert a national
fiscal crisis. The big questions are when it will happen and
what form it will take.
In my judgment, it is far more important to get the right
answer to the question of â€œwhatâ€ than â€œwhen.â€ It would be
a shame to let short-term political feasibility dominate the
discussion. Political leaders who aspire to greatness first decide
what needs to be done and then set about making it politically
feasible. If the current health care reform initiative is limited
to questions of coverage, without serious attention to cost
control and coordination of care, the â€œcrisisâ€ in health care
will continue to plague us for years to come.
Dr. Fuchs reports receiving grant support from the Blue Shield of California
Foundation. No other potential conflict of interest relevant to this article was
Dr. Fuchs is a professor emeritus of economics at Stanford University, Stanford,
1. Hirshfield DS. The lost reform: the campaign for compulsory health
insurance in the United States from 1932-1943. Cambridge, MA:
Harvard University Press, 1970.
Copyright Â© 2009 Massachusetts Medical Society.
THREE â€œINCONVENIENT TRUTHSâ€ ABOUT HEALTH CARE | 21
A strong case for comprehensive reform of the U.S. health
care system has been made many times. The high cost of care,
the large number of uninsured people, and the rapid increase
in expenditures year after year have convinced many that our
system is a mess. The obstacles to reform, however, are numerous
and complex and have thus far proved insurmountable. The
present impasse must give way to recognition that major
change will not be an option much longer: it will be a necessity.
Divergent interests and values must find some common ground,
and all sides must acknowledge that the status quo is no longer
sustainable, given three â€œinconvenient truthsâ€ about health care.
1. Over the past 30 years, U.S. health care expenditures have
grown 2.8% per annum faster, on average, than the rest of the
economy. If this differential continues for another 30 years, health
care expenditures will absorb 30% of the gross domestic product1
â€” a proportion that exceeds that of current government spending
for all purposes combined.
The negative implications of such increases for the
support of education, infrastructure, national security, capital
investment, and ordinary consumption would be huge. Alice
Rivlin, who served as director of the Congressional Budget
Office, director of the Presidentâ€™s Office of Management and
Budget, and vice-chair of the Federal Reserve Board, has
written, â€œThe principal challenge to achieving a sustainable
long-run fiscal policy turns out to be reducing the rate of
growth of health spending â€” all health spending, not just the
federal or the federal/state portion.â€2
Much discussion of reform concentrates on covering
the uninsured. This is a worthy goal, but without sustained
attention to the cost of care, gains in coverage will not be
sustainable. At present, the United States spends about twice
as much per person on health care as the average high-income
country. An absolute reduction in that level of spending would
be desirable but is not likely. The most tempting targets â€”
â€œwaste,â€ â€œfraud,â€ and â€œabuseâ€ â€” have proven remarkably
resistant to attack.
A major reason why it is so difficult to reduce costs is that
every dollar of health care spending is a dollar of income to
someone involved in providing health insurance or health care.
Administrative costs are undoubtedly too high, and insurance
companies taking excess profits and executives with high
salaries are frequently blamed. But they are only a small part
of the story. The biggest part consists of payments to tens of
thousands of telephone and computer operators, claim payers,
insurance salespersons, actuaries, benefit managers, consultants,
and other low- and middle-income workers. Overutilization of
care is another problem that is not easily solved, partly because
unnecessary or marginally useful tests, prescriptions, operations,
and visits generate income for providers.
More regulation wonâ€™t do much to reduce administrative
costs or overutilization. On the contrary, in most industries,
regulation has usually raised costs. The only way for the
country to restrain costs without hurting quality is to make
major changes in the way health insurance is financed and the
way health care is organized and delivered. A realistic â€” and
over the long run the most important â€” goal for health care
reform is not to reduce costs but to slow their rate of growth.
2. Advances in medicine are the main reason why health care
spending has grown 2.8% per annum faster than the rest of the
But advances in diagnostic and therapeutic interventions
have been largely responsible for increases in the length and
quality of life. How can we retain most of the health benefits
of future medical advances while slowing the rate of growth of
health care expenditures?
Part of the answer lies in the creation of a large, semiindependent organization â€” something like Britainâ€™s National
Institute for Health and Clinical Excellence â€” to evaluate
Reprinted with permission from the New England Journal of Medicine, October 23, 2008.
Three â€œInconvenient Truthsâ€ About Health Care
By Victor R. Fuchs, Ph.D.
22 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
the benefits and costs of new medical interventions. Such
an organization must have a substantial budget, because new
interventions flood the market every year and new applications
of older technologies add to this problem. It is not feasible for
individual physicians or even large groups of physicians to
carry out the necessary analyses, especially when estimates
of costs and benefits are indispensable. Furthermore, the
funding for such an organization must be relatively steady over
time; funding based on the vagaries of annual Congressional
appropriations have doomed previous governmental initiatives
for technology assessment.
The other part of the answer is for health care organizations
to be willing and able to incorporate the assessments into their
daily practice. They must have the information, infrastructure,
and incentives to deliver high-quality, cost-effective care. This
does not mean that they must be fully integrated group practices.
It does mean that they must create mechanisms, relationships,
and processes to achieve the coordination of care that todayâ€™s
patients and todayâ€™s health care technologies require.
3. Universal coverage requires subsidies for the poor and those
too sick to afford insurance at an actuarially appropriate premium;
it also requires compulsion for those who donâ€™t want to help pay for
the subsidies or who want a â€œfree ride,â€ expecting that they will get
care if they need it.
No country achieves universal coverage without subsidization
and compulsion, but U.S. politicians tie themselves and the
health care system in knots by proposing reforms designed to
conceal these realities. Politically, the most appealing plans are
those that mislead people into thinking that someone else is
paying for their insurance. Currently more than half of insured
Americans obtain their coverage through employment, and
workers have been led to believe that their employer bears most
of the cost of their care â€” a belief that labor-market experts
have concluded is invalid.4
When a firm pays $3,000 to $7,000
per worker per year for health care, it can get that money in only
three ways: reducing potential wage increases, increasing prices
for what the firm sells (which means lower real wages for workers
everywhere), or lowering profits.
During the past three decades, health insurance premiums
have increased about 300% (after adjustment for general
inflation). Where did the money come from for higher premiums?
Out of wage increases that would normally accompany growth in
productivity. During these three decades, the average worker has
not received any increase in inflation- adjusted wages. Corporate
profits, by contrast, have in creased by 232% before taxes (284%
after taxes), adjusted for inflation.5
The belief that employer
contributions to health insurance come out of corporate profits
rather than workersâ€™ real wages reflects the triumph of hope over
experience â€” and represents a tremendous obstacle to gaining
public support for a more efficient, more equitable way to pay
for health insurance. The confusion about employersâ€™ role is
paralleled by confusion about governmentâ€™s role. Politicians
often claim that the government is â€œgivingâ€ people health
insurance. In fact, every dollar the government spends on
health insurance must come out of the publicâ€™s pocket. If the
government is acting responsibly, the money will come in the
form of taxes. If irresponsibly, it will be borrowed, creating debts
for which future generations will have to tax themselves in order
to pay interest and principal.
The most efficient, equitable way to achieve universal
coverage is to make basic health insurance available to everyone
regardless of income, employment status, family circumstances,
or other characteristics and to pay for it with a tax roughly
proportional to income or consumption. In such a system, the
wealthy and the healthy would subsidize insurance for the poor
and the sick. Persons of average income and average health
would pay enough to cover the cost of their own insurance.
The long-running debate about health insurance and health
care that is continuing this fall will be more constructive, and
possibly more fruitful, if all the participants would take these
â€œinconvenient truthsâ€ as a starting point.
Dr. Fuchs reports receiving grant support from the Blue Shield of California
Foundation. No other potential conflict of interest relevant to this article was
Dr. Fuchs is a professor emeritus of economics at Stanford University, Stanford,
1. The long-term outlook for health care spending. Washington, DC:
Congressional Budget Office, November 2007. (Accessed October 3, 2008,
2. Rivlin AM, Boskin MJ. Perspectives on the long-run fiscal outlook.
SIEPR policy brief. Palo Alto, CA: Stanford University, July 2007:4.
3. Pauly MV. Competition and new technology. Health Aff (Millwood)
4. Gruber J. Health insurance and the labor market. In: Culyer AJ,
Newhouse JP, eds. Handbook of health economics. Vol. 1. New York:
Elsevier Science, 2000:645-706.
5. Statistical tables relating to income, employment, and production.
In: Council of Economic Advisers. Economic report of the president.
Washington, DC: Government Printing Office, February 2007:Tables 3,
THE PERFECT STORM OF OVERUTILIZATION | 23
A â€œperfect stormâ€ occurs when a confluence of many
factors or eventsâ€”no one of which alone is particularly
devastatingâ€”creates a catastrophic force. Such confluence
is rare and devastating. Over time and through disconnected
events, US health care has evolved into a â€œperfect stormâ€ that
drives overutilization and increases the cost of health care.
Higher Costs in the United States
The United States spends substantially more per person
on health care than any other country, and yet US health
outcomes are the same as or worse than those in other
coutries.1,2 In 2005, the last year for which comparative
statistics are available, the United States spent $6401 per
person, whereas the next highest spending was in Norway
and Switzerland, $4364 and $4177, respectively (TABLE).3,4
Overall, US health care expenditures are 2.4 times the average
of those of all developed countries ($2759 per person), yet
health outcomes for US patients, whether measured by life
expectancy, disease-specific mortality rates, or other variables,
are unimpressive (Table).1,3,4
There are many explanations for the higher costs of US
health care. Because health insurance must be underwritten
and sold to individual employers and self-insured individuals,
administrative costs exceed $145 billion. This does not include
employersâ€™ costs for purchasing and managing employeesâ€™
health insurance. One estimate suggests that the private
employer insurance market wastes more than $50 billion in
A second factor is higher prices in the United States for
important inputs to health care, such as physiciansâ€™ services,
prescription drugs, and diagnostic testing. US physicians
earn double the income of their peers in other industrialized
countries (Table). Similarly, prices to the public for drugs
in the United States are 10% to 30% higher than in other
Disparities in prices of inputs to health
care account for at least $100 billion annually of higher
spending in the United States.5
A third contributor to US costs is the abundance of
amenities. Hospital rooms in the United States offer more
privacy, comfort, and auxiliary services than do hospital rooms
in most other countries. US physiciansâ€™ offices are typically
more conveniently located and have parking nearby and more
attractive waiting rooms.
Overutilization of Health Care
The most important contributor to the high cost of US
health care, however, is overutilization. Overutilization
can take 2 forms: higher volumes, such as more office visits,
hospitalizations, tests, procedures, and prescriptions than are
appropriate or more costly specialists, tests, procedures, and
prescriptions than are appropriate.
It ismorecostly care, rather than high volume, that accounts
for higher expenditures in the United States. The volume of
services is not extreme.Ahospitalization rate of 121 per 1000
US patients is higher than that of Japan (106) but considerably
lower than the rate in Switzerland (157), Norway (173), and
France (268) and lower than the Organisation for Economic Cooperation and Development(OECD)average (163) (Table).3,4
TheUShospitalization rate is 21stof30OECDcountries.
Similarly, US patients have 3.8 physician visits annually per
capita, fewer than the OECD average of 6.8.3,4,6
In contrast with volume, in which the United States is not
the leader, there are almost 3 times as many magnetic resonance
imaging scanners in the United States as the OECD average,
higher only in Japan.3,4 US patients receive considerably
more cardiac revascularization procedures (579 per 100 000
population)â€”coronary artery bypass grafts, angioplasties, and
stentsâ€”45% more than patients in Norway, the country with
Reprinted with permission from the Journal of American Medical Association, June 18, 2008.
The Perfect Storm of Overutilization
By Victor R. Fuchs, Ph.D. and Ezekiel J. Emanuel, MD, PhD
24 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
the next highest number (Table).3,4 The United States has the
fourth highest per capita consumption of pharmaceuticals.6
patients utilize many more â€œnew drugsâ€â€” those on the market 5
years or fewerâ€”than patients in other countries.6
ezetimibe, which decreases lowdensity lipoprotein cholesterol
level and was approved in October 2002, is not recommended
by major guidelines7
as first-line therapy. Nevertheless, the use
of ezetimibe in the United States is about 5 times higher than
it is in Canada, constituting more than 15% of prescriptions
for lipidlowering agents.8
Greater use of new, more expensive
pharmaceuticals, as well as higher prices both for older and
newer drugs, helps explain why the United States spent $752
per capita (2005) on drugs, whereas France, with the next
highest expenditure, spent $559 and Japan just $425.3,4,6
The Ingredients of the Perfect
Health Care Storm
At least 7 factors drive overuse, 4 related to physicians and
3 related to patients. First, there is the matter of physician
culture. Medical school education and postgraduate training
emphasize thoroughness. When evaluating a patient, students,
interns, and residents are trained to identify and praised for
and graded on enumerating all possible diagnoses and tests
that would confirm or exclude them. The thought is that the
more thorough the evaluation, the more intelligent the student
or house officer. Trainees who ignore the improbable â€œzebraâ€
diagnoses are not deemed insightful. In medical training,
meticulousness, not effectiveness, is rewarded.
This mentality carries over into practice. Peer recognition
goes to the most thorough and aggressive physicians. The
prudent physician is not deemed particularly competent, but
rather inadequate. This culture is further reinforced by a
unique understanding of professional obligations, specifically,
the Hippocratic Oathâ€™s admonition to â€œuse my power to
help the sick to the best of my ability and judgmentâ€ as an
imperative to do everything for the patient regardless of cost
or effect on others.
Second, fee-for-servicepaymentmisaligns incentives; it
creates a big incentive for overutilization. Although most
physicians are not income maximizers, they know that it is better
to be paid to do something, and the higher the payment the
better. Paying for doing more adds a strong financial motivation
to what is often a slim clinical rationale for an intervention.
Furthermore, the current systemâ€™s bias toward paying
significantly more for procedures rather than for evaluation and
management reduces physiciansâ€™ inclination to watch, wait,
andcommunicateandincreases their propensity to order a test.
This financial incentive for physicians to order and perform
more expensive procedures is compounded by marketing.
Physicians face a paradoxic situation. They are flooded with
information; each month there are hundreds of publications
on cancer alone. Simultaneously, there is a paucity of data
comparing different treatments and interventions. It is time
consuming and difficult for physicians to judiciously incorporate
new data into their practices. This creates a powerful role for
physician-directed pharmaceutical marketing, which expends
Table. International Comparisons of Health Care Costs, Quality, and Outcomes a
Indicatorb United States Norway Switzerland France Japan OECD Average
Health care expenditures per capita (2005), US $ 6401 4364 4177 3374 2249 2560
Infant mortality, per 1000 births (2005) 6.8 3.1 4.2 3.6 2.8 5.4
Cancer mortality, per 100 000 population (2004) 203 201 186 244 208 227
Ischemic heart disease mortality, per 100 000 male
170.3 120.7 95.2 64.2 42.0 141.6
Life expectancy at age 65, female patients (2005),
20.0 20.1 21.0 21.4 23.2 19.6
Hospital discharges, per 1000 population (2005) 121 173 157 268 106 163
Annual physician office visits per capita (2004) 3.8 NA 3.4 6.6 13.8 6.8
Physician salaries, specialists/general practitioners,
230 000/161 000 77 000/
130 000/116 000 149 000/92 000 NA 113 000/83 000
Pharmaceutical spending per capita (2005), US $ 752 375 424 559 425 383
Use of new pharmaceuticals (No. of drugs released
in last 5 y relative to US per capita) (2005)
100 NA NA 65 40 NA
Coronary revascularization procedures (bypass,
percutaneous transluminal coronary
angioplasty, stenting) per 100 000 population
579 320 134 196 NA 245
Cesarean deliveries, % of births (2004) 29 15 26 18 NA 28
Abbreviations: NA, not available; OECD, Organisation for Economic Co-operation and Development. aAll dollar figures adjusted for US dollar purchasing power parity. bSources: OECD,
3 Congressional Research Service,
4 and Danzon and Furukawa.
THE PERFECT STORM OF OVERUTILIZATION | 25
more than $7 billion annuallyâ€”about $10 000 per physician.9
Companies can selectively highlight favorable studies from
the mass of research, confident that there are few comparative
effectiveness data for physicians to put the marketersâ€™ desired
conclusions into a proper context.
Medical malpractice laws and the resultant defensive
medicine also contribute to overutilization. There is controversy
about whether malpractice litigation and concomitant real
cost of premiums are increasing or decreasing. There is no
doubt, however, about the increase in physiciansâ€™ concern
about malpractice suits and their inclination to do more.
Then there is the patient side. US patients prefer high
technology over high touch. As the energy crisis highlights,
Americans tend to embrace technologic fixes for problems. US
culture emphasizes the new and the fancy; old and plain is
equated with deprivation.2
In the medical sphere, this cultural
value informs a patient perception that doing more tests and
receiving more treatments and interventions is receiving
better care. This helps to explain inappropriate prescribing of
antibiotics for viral infections.
A sixth contributor is direct-to-consumer marketing.
Pharmaceutical companies spend more than an estimated
$4 billion annually advertising prescription drugs, with the
concluding advice of â€œtalk to your doctor about. . . . â€9
drive patientsâ€™ requests for new and more costly medications.
In normal markets, demand is modulated by cost. But thirdparty payment for patients attenuates this control. Although
patients experience deductibles, co-payments, and other out-ofpocket expenses, health insurance and gov ernment programs
significantly shield patientsâ€™ decisions from the true costs of
Alone, each of these factors would induce some overutilization. When they coincide, however, they amplify and reinforce
each other to create a perfect storm of â€œmoreâ€: more referrals
to specialists, expensive tests, procedures, and treatments.
For instance, patientsâ€™ desires for â€œpeace of mind,â€ physiciansâ€™
training to be thorough, and worries about malpractice suits
coalesce to induce more testing and treatments. When physicians make money on interventions and patients pay little for
them, cost becomes largely irrelevant. The relative costunconscious environment augments the incentive for drug, device,
and other manufacturers to develop more new expensive tests
and treatments, even when they provide small marginal benefits to patients.
Policy Implications of the Perfect Storm
Some elements in the perfect storm are difficult or impossible
to change; some, arguably, should not change. Changing
Americansâ€™ affinity for new technology is somewhere between
difficult, impossible, and undesirable.2
Calls for changing physician training and culture are
perennial and usually ignored. However, the progression in endoflife care mentality from â€œdo everythingâ€ tomorepalliative care
shows that chang ein physician norms and practices is possible.
The escalation in health care costs poses a great challenge
to the leaders of US medicine to recognize the gravity of the
situation and to move toward more socially sustainable, costeffective care. Rapid reforms of medical education and training,
even when widely acknowledged as essential, are uncommon.
Another potential policy change is to curb aggressive
marketing to physicians and consumers. After recent problems
with new, heavily promoted pharmaceuticals, there is increasing
pressure to reduce or eliminate direct-to-consumer advertising.
Simultaneously, there are credible calls for restricting the access
of â€œpharmaceuticalâ€ representatives to physicians.10 Although
laudable, such changes alone are unlikely to have a large effect
on overutilization. Similarly, changes in malpractice law could
help: Some experts estimate defensive medicine adds 5% to
9% to health care expenditures,11 but reform would affect only
some defensive practices.
Realistically, the most effective policy change would be
to alter how insurance pays for medical services. One step is
for more value-based co-payments, modeled on current tiered
pharmaceutical benefits, that link the amount patients pay to
effectiveness and cost of alternatives.12 For instance, men with
early stage prostate cancerwhochoose radiation therapy might
have no co-payment for 3-dimensional conformal radiation
but might have to cover the marginal cost if they want more
expensive intensity-modulated radiation therapy. Valuebased
co-payments would promote high-value interventions and
discourage use of marginal medicine. It would help if patients
were financially sensitive to the cost of care, but not if out-ofpocket costs inhibit use of needed services, resulting in higher
costs later. This is not an all-or-nothing rationing scheme, but
rather an ethical way to have patients experience costs but not
at the expense of important outcomes.12
Finally, private and public payers for health care must
work on developing better financial incentives for physicians
and hospitals to provide more cost-effective care. Many more
experiments are needed with pay for performance, bundled
payments, partial capitation, value-based payment, or other
payment methods that promote prudent use of resources.
Such experiments with different ways of paying for health
care services must be combined with careful monitoring of
utilization, cost, and quality.
26 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
The United States has created the perfect storm for
overutilization of health care. Costs cannot be controlled
unless overutilization is substantially reduced. Many physician
and patient factorsâ€”ingrained values, physician culture,
advertising, paymentâ€”drive and synergistically intensify
overutilization. The best hope for reining in costs is to devise
financial incentives for physicians and patients that result in
greater health care value.
Author Affiliations: Department of Bioethics, The Clinical Center, National
Institutes of Health, Bethesda, Maryland (Dr Emanuel); and Department of
Economics, Stanford University, Stanford, California (Dr Fuchs).
Corresponding Author: Ezekiel J. Emanuel, MD, PhD, Department of Bioethics,
Bldg 10, Room 1C118, National Institutes of Health, Bethesda, MD 20892-1156
Financial Disclosures: None reported.
Funding/Support: Funding was provided by the Robert Wood Johnson
Foundation and Blue Shield of California Foundation, neither of which had any
control over the content of this article.
Disclaimer: The views expressed are those of the authors and do not represent
the policies or opinions of the Department of Health and Human Services, the
National Institutes of Health, or the US Public Health Service.
Additional Contributions: We thank Alan Werthehimer, PhD, for crucial
comments on the manuscript and Colleen Denny, BS, for research assistance and
1. American College of Physicians. Achieving a high performance health
care system with universal access: what the United States can learn from
other countries. Ann Intern Med. 2008;148(1):55-75.
2. Emanuel EJ. What cannot be said on television about health care.
JAMA. 2007; 297(19):2131-2133.
3. Organisation for Economic Co-operation and Development. Health at a
glance 2007: OECD indicators. http://oberon.sourceoecd.org/vl=1643589/
cl=22/nw=1/rpsv/health2007/index.htm. Accessed May 30, 2008.
4. Congressional Research Service. US health care spending: comparison
with other OECD countries. September 17, 2007. http://assets.opencrs.
com/rpts/RL34175_20070917.pdf. Accessed May 30, 2008.
5. Angrisano C, Farrell D, Kocher B, Laboissiere M, Parker S. Accounting
for the Cost of Health Care in the United States. San Francisco, CA:
McKinsey Global Institute; 2007. http://www.mckinsey.com/mgi/rp/
healthcare/accounting_cost_healthcare.asp. Accessed May 30, 2008.
6. Danzon PM, Furukawa MF. International prices and availability of
pharmaceuticals in 2005. Health Aff (Millwood). 2008;27(1):221-233.
7. Grundy SM, Cleeman JI, Merz CN, et al. Implications of recent clinical
trials for the National Cholesterol Education Program Adult Treatment
Panel III guidelines [published correction appears in Circulation.
2004;110:763]. Circulation. 2004;110(2):227-239.
8. Jackevicius CA, Tu JV, Ross JS, Ko DT, Krumholz HM. Use of ezetimibe
in the United States and Canada. N Engl J Med. 2008;358(17):1819-
9. General Accountability Office. Prescription Drugs: Improvements Needed
in FDAâ€™s Oversight of Direct-to-Consumer Advertising. Washington, DC:
US Government Printing Office; 2006. http://www.gao.gov/htext/d0754.
html. Accessed May 30, 2008.
10. Association of American Medical Colleges. Report of the AAMC Task
Force on Industry Funding of Medical Education to the AAMC Executive
Council. Washington, DC: AAMC; 2008. http://www.aamc.org/
research/coi/industryfunding.pdf. Accessed May 30, 2008.
11. Kessler D, McClellan M. Do doctors practice defensive medicine? Q J
12. Denny CC, Emanuel EJ, Pearson SD. Why well-insured patients should
demand value-based insurance benefits. JAMA. 2007;297(22):2515-
W H O R E ALLY PAYS FO R H E ALT H C AR E ? T H E MY T H O F â€œ SHAR ED R E SP O NSI B I LI T Y â€ | 27
When asked who pays for health care in the United States,
the usual answer is â€œemployers, government, and individuals.â€
Most Americans believe that employers pay the bulk of workersâ€™
premiums and that governments pay for Medicare, Medicaid,
the State Childrenâ€™s Health Insurance Program (SCHIP), and
However, this is incorrect. Employers do not bear the cost
of employment-based insurance; workers and households pay
for health insurance through lower wages and higher prices.
Moreover, government has no source of funds other than taxes
or borrowing to pay for health care.
Failure to understand that individuals and households
actually foot the entire health care bill perpetuates the idea
that people can get great health benefits paid for by someone
else. It leads to perverse and counterproductive ideas regarding
health care reform.
The Myth of Shared Responsibility
Many sources contribute to the misperception that
employers and government bear significant shares of health
care costs. For example, a report of the Centers for Medicare
& Medicaid Services states that â€œthe financial burden of
health care costs resides with businesses, households, and
governments that pay insurance premiums, out-of-pocket
costs, or finance health care through dedicated taxes or
A New America Foundation report claims,
â€œThere is growing bipartisan support for a health system based
on shared responsibilityâ€”with the individual, employers, and
government all doing their fair share.â€2
The notion of shared responsibility serves many interests.
â€œResponsibilityâ€ is a popular catchword for those who believe
everyone should pull their own weight, while â€œsharingâ€ appeals
to those who believe everyone should contribute to meeting
common social goals. Politicians welcome the opportunity
to boast that they are â€œgivingâ€ the people health benefits.
Employers and union leaders alike want workers to believe
that the employer is â€œgivingâ€ them health insurance. For
example, Steve Burd, president and chief executive officer of
Safeway, argued that decreasing health care costs is critical to
his companyâ€™s bottom line â€” as if costs come out of profits.3
A highly touted alliance between Wal-Mart and the Service
Employees International Union for universal coverage pledged
that â€œbusinesses, governments, and individuals all [must]
contribute to managing and financing a new American health
The Massachusetts health care reform plan is constructed
around â€œshared responsibility.â€ The rhetoric of health reform
proposals offered by several presidential candidates helps
propagate this idea. Hillary Clinton, for instance, claims that
her American Health Choices plan â€œis based on the principle
of shared responsibility. This plan ensures that all who benefit
from the system contribute to its financing and management.â€5
It then lists how insurance and drug companies, individuals,
clinicians, employers, and government must each contribute to
the provision of improved health care.
With prominent politicians, business leaders, and experts
supporting shared responsibility, it is hardly surprising that
most Americans believe that employers really bear most of the
cost of health insurance.
The Health Care Costâ€“Wage Trade-off
Shared responsibility is a myth. While employers do
provide health insurance for the majority of Americans, that
does not mean that they are paying the cost. Wages, health
insurance, and other fringe benefits are simply components of
overall worker compensation. When employers provide health
insurance to their workers, they may define the benefits, select
the health plan to manage the benefits, and collect the funds
Reprinted with permission from JAMA, March 5, 2008.
Who Really Pays for Health Care? The Myth of
By Ezekiel J. Emanuel, MD, PhD and Victor R. Fuchs, Ph.D.
28 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
to pay the health plan, but they do not bear the ultimate cost.
Employersâ€™ contribution to the health insurance premium is
really workersâ€™ compensation in another form.
This is not a point merely of economic theory but of historical
fact. Consider changes in health insurance premiums, wages, and
corporate profits over the last 30 years. Premiums have increased
by about 300% after adjustment for inflation. Corporate profits
per employee have flourished, with inflation-adjusted increases
of 150% before taxes and 200% after taxes. By contrast, average
hourly earnings of workers in private nonagricultural industries
have been stagnant, actually decreasing by 4% after adjustment
for inflation. Rather than coming out of corporate profits, the
increasing cost of health care has resulted in relatively flat real
wages for 30 years. That is the health care costâ€“wage trade-off.6
Figure. Changes in Per Capita Health Expenditures and
Average Hourly Earnings (Adjusted for Inflation), 1982-2005
â€“2 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
% Annual Change
Trend of Heath Care Costs and Wages
Net per capita increase in medical expenditures
Annual change in average hourly earnings
Data are from the Council of Economic Advisers 6 and Catlin et al. 7
Even over shorter periods, workersâ€™ average hourly earnings
fluctuate with changes in health care expenditures (adjusted
for inflation) (FIGURE). During periods when the real annual
increases in health care costs are significant, as between 1987 and
1992 and again between 2001 and 2004, inflation-adjusted hourly
earnings are flat or even declining in real value. For a variety of
reasons, the decline in wages may lag a few years behind health
care cost increases. Insurance premiums increase after costs
increase. Employers may be in binding multiyear wage contracts
that restrict their ability to change wages immediately. Conversely,
when increases in health care costs are moderate, as between 1994
and 1999, increases in productivity and other factors translate into
higher wages rather than health care premiums.
The health care costâ€“wage trade-off is confirmed by many
economic studies.8-11 State mandates for inclusion of certain
health benefits in insurance packages resulted in essentially all
the cost of the added services being borne by workers in terms
of lower wages.12 Similarly, using the Consumer Expenditure
Survey, Miller13 found that â€œthe amount of earnings a worker
must give up for gaining health insurance is roughly equal to
the amount an employer must pay for such coverage.â€ Baicker
and Chandra14 reported that a 10% increase in state health
insurance premiums generated a 2.3% decline in wages, â€œso
that [workers] bear the full cost of the premium increase.â€
Importantly, several studies show that when workers lose
employer-provided health insurance, they actually receive pay
increases equivalent to the insurance premium.8,12
In a review of studies on the link between higher health care
costs and wages, Gruber15 concluded, â€œThe results [of studies]
that attempt to control for worker selection, firm selection, or
(ideally) both have produced a fairly uniform result: the costs
of health insurance are fully shifted to wages.â€
The Costâ€“Public Service Trade-off
A large portion of health care coverage in the United States
is provided by the government. But where does governmentâ€™s
money for health care come from? Just as the ultimate cost
of employer-provided health insurance falls to workers, the
burden of government-provided health coverage falls on
the average citizen. When government pays for increases in
health care costs, it taxes current citizens, borrows from future
taxpayers, or reduces other state services that benefit citizens:
the health care costâ€“public service trade-off.
Health care costs are now the single largest part of state
budgets, exceeding education. According to the National
Governors Association, in 2006, health care expenditures
accounted for an average of 32% of state budgets, while Medicaid
alone accounted for 22% of spending.16 Between 2000 and
2004, health care expenditures increased substantially, more
than 34%, with Medicaid and SCHIP increasing more than
These increases far exceeded the increase in state tax
receipts. In response, some states raised taxes, others changed
eligibility requirements for Medicaid and other programs,
and still others reduced the fees and payments to physicians,
hospitals, and other providers of health care services.
However, according to a Rockefeller Institute of Government
study of how 10 representative states responded, probably the
most common policy change was to cut other state programs,
and â€œthe program area that was most affected by state budget
difficulties in 2004 was public higher education â€¦ On average,
the sample states projected spending 4.5% less on higher
education in FY 2004 than in FY 2003, and raised tuition and
fees by almost 14% on average.â€17 In other words, the increasing
cost of Medicaid and other government health care programs are
W H O R E ALLY PAYS FO R H E ALT H C AR E ? T H E MY T H O F â€œ SHAR ED R E SP O NSI B I LI T Y â€ | 29
a primary reason for the substantial increase in tuition and fees
for state colleges and universities. Middle-class families finding
it more difficult to pay for their childrenâ€™s college are unwittingly
falling victim to increasing state health care costs. Not an easy â€”
but a necessary â€” connection to make.
The widespread failure to acknowledge these effects of
increasing health care costs on wages and on government
services such as education has important policy implications.
The myth of shared responsibility perpetuates the belief that
workers are getting something while paying little or nothing.
This undercuts the publicâ€™s willingness to tax itself for the
benefits it wants.
This myth of shared responsibility makes any reform that
removes employers from health care much more difficult to
enact. If workers and their families continue to believe that they
can get a substantial fringe benefit like health insurance at no
cost to themselves, they are less likely to consider alternatives.
Unless this myth is dispelled, the centerpiece of reform is likely
to be an employer mandate. This is regrettable and perpetuates
the widely recognized historical mistake of tying health care
coverage to employment. Furthermore, an employer mandate
is an economically inefficient mechanism to finance health
care. Keeping employers in health care, with their varied
interests and competencies, impedes major changes necessary
for insurance portability, cost control, efficient insurance
exchanges, value-based coverage, delivery system reform, and
many other essential reforms.18,19 Employers should be removed
from health care except for enacting wellness programs that
directly help maintain productivity and reduce absenteeism.
Politiciansâ€™ rhetoric about shared responsibility reinforces
rather than rejects this misconception and inhibits rather
than facilitates true health care reform.
Not only does third-party payment attenuate the incentive
to compare costs and value, but the notion that someone else is
paying for the insurance further reduces the incentive for cost
control. Getting Americans invested in cost control will require
that they realize they pay the price, not just for the deductibles
and co-payments, but for the full insurance premiums too.
Sustainable increases in wages require less explosive growth
in health care costs. Only then will increases in productivity
show up in higher wages and lower prices, giving a boost to
real incomes. Similarly, the only way for states to provide
more support for education, environment, and infrastructure
is for health care costs to be restrained. Unless the growth in
Medicaid and SCHIP are limited to â€” or close to â€” revenue
increases, they will continue to siphon money that could be
Discussions of health care financing in the United
States are distorted by the widely embraced myth of shared
responsibility. The common claim that employers, government,
and households all pay for health care is false. Employers do not
share fiscal responsibility and employers do not pay for health
care â€” they pass it on in the form of lower wages or higher
prices. It is essential for Americans to understand that while
it looks like they can have a free lunch â€” having someone
else pay for their health insurance â€” they cannot. The money
comes from their own pockets. Understanding this is essential
for any sustainable health care reform.
Financial Disclosures: None reported.
Funding/Support: This research was supported by the Blue Shield Foundation
of California, the Robert Wood Johnson Foundation, and the Department of
Bioethics at the National Institutes of Health.
Role of the Sponsors: The funders had no role in the preparation, review, or
approval of the manuscript.
Disclaimer: The opinions expressed are the authorsâ€™ own. They do not represent
any position or policy of the National Institutes of Health, Public Health Service,
or Department of Health and Human Services.
Additional Contributions: Colleen Denny, BS, Brigette Madrian, PhD, and
Rossannah Reeves assisted with data and analyses. No financial compensation
Author Affiliations: Department of Bioethics, Clinical Center, National
Institutes of Health, Bethesda, Maryland (Dr Emanuel); Department of
Economics, Stanford University, Stanford, California (Dr Fuchs).
Corresponding Author: Ezekiel J. Emanuel, MD, PhD, Department of Bioethics,
National Institutes of Health, 10 Center Dr, Bldg 10, Room 1C118, Bethesda,
MD 20892 ([email protected]).
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sponsors: business, household and government. http://www.cms.hhs.gov/
NationalHealth ExpendData/downloads/bhg08.pdf. Accessed February 6,
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in Health Care. Washington, DC: New America Foundation; June 2007.
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3. Burd S. Meeting the US health care challenge. US Chamber
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February 6, 2008.
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analysis of compensating differentials. South Econ J. 1985;52:274-280.
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j03.pdf. Accessed February 6, 2008.
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MA: National Bureau of Economic Research; January 2006. NBER Working Paper No. 11980. http://www.nber.org/papers/w11980. Accessed February 6, 2008.
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Premiums. Cambridge, MA: National Bureau of Economic Research;
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18. Blumenthal D. Employer-sponsored health insurance in the United
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W HAT AR E T H E PR OSPEC T S FO R EN D U R I N G CO M PR EH ENSI V E H E ALT H C AR E R EFO R M ? | 31
ABSTRACT: Enduring reform must cover the uninsured,
reduce inefficiency in funding and delivery of care, improve
quality, and tame but not destroy the development of new
medical technologies. Obstacles to reform include â€œspecial
interests,â€ especially as they exploit the U.S. political system;
Machiavelliâ€™s Law of Reform, which favors the status quo; and
the inability of reformers to agree on a common approach.
Short-term prospects for enduring comprehensive reform
are virtually nil. Over five to ten years, prospects are fiftyfifty unless there were a major economic, political, social,
or public health crisis. In the long run, major reform is
inevitable. [Health Affairs 26, no. 6 (2007): 1542â€“1544;
Enduring reform of health care must be comprehensive. It
must cover the uninsured without exceptions or conditions.
It must reduce the huge inefficiencies in the way the country
funds health care by eliminating employment-based insurance
and income-tested subsidies. It must improve efficiency in
medical practice by providing physicians with the information,
infrastructure, and incentives they need to deliver costeffective
care. Reform must also eliminate gross lapses in quality and
must tame but not destroy the development and diffusion of
expensive new medical technologies. This is a tall order. A
century of failed attempts at major reform tells us that these
goals will not be easily attained.
Obstacles To Reform
Special interests. What are the obstacles? First, and in
many observersâ€™ view, foremost, are â€œspecial interests.â€Who
are they? At one time, organized medicine played a leading
role in blocking change. That is less true today; indeed,many
physicians are among the leading advocates of reform. The
insurance industry now spearheads the opposition,with
drug, device, and equipment manufacturers also being major
defenders of the status quo. â€œSpecial interestsâ€ is an easy
answerâ€”perhaps too easy. After all, every country has â€œspecial
interests.â€ Why are they so much more effective in the United
States? I believe that the explanation lies at least in part with
the U.S. political system, which creates so many opportunities
for â€œspecial interestsâ€ to exert disproportionate influence.
In comparison with those of other developed nations, the
U.S. political system is notable for the importance ofmoney
for campaigns and the importance of the primaries in creating
partisan politics in Congress. Also important is the division of
power among the administration, the House of Representatives,
the Senate, and the numerous committees in each House.
From the primaries to the elections to the hearings to the
passing and signing of legislation, there are numerous â€œchokeâ€
points where well-organized â€œspecial interestsâ€ can block the
will of the majority.
Machiavelliâ€™s (and othersâ€™) law. A second important
obstacle is what should be called â€œMachiavelliâ€™s Law of Reform.â€
In The Prince, Machiavelliâ€™smasterpiece of shrewd political
observations, he wrote, â€œThe reformer has enemies in all those
who profit from the old order and only lukewarm defenders in
all those who would profit from the neworder.â€ Thomas Jefferson
What Are the Prospects for Enduring Comprehensive
Health Care Reform?
Over the long term, major reform is
By Victor R. Fuchs
Reprinted with permission from Health Affairs. November/December 2007.
32 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
expressed a similar idea in the Declaration of Independence: â€œAll
experience hath shown that mankind are disposed to suffer, while
evils are sufferable than to right themselves by abolishing the forms
to which they are accustomed.â€ In recent times, the psychologists
Daniel Kahneman and Amos Tversky have formulated this
idea more rigorously in their â€œprospect theory.â€1
experiments with human subjects, they concluded that most
people attach more weight to fear of loss than they do to hope of
gain.Most of the time, inertia rules.
Lack of unity. A third major obstacle has been health care
reformersâ€™ inability to unite behind a single approach. This is
not a new phenomenon. In commenting on the failure of health
care reform efforts early in the past century, Daniel Hirschfield
in The Lost Reform wrote, â€œSome saw health insurance
primarily as an educational and public health measure, while
others argued that it was an economic device to precipitate a
needed reorganization of medical practice.â€¦ Some saw it as a
device to save money for all concerned, while others felt sure
that it would increase expenditures.â€2
Consider the present situation. Suppose as much as 75
percent of the public favors universal coverage (probably an
overestimate). If 25 percent want mandates, 25 percent favor
Medicare for all, and 25 percent strongly prefer a voucher
system, prospects for reform are dim unless the three groups
can unite behind a common approach.
Prospects For Reform
In the short term. Given these and other obstacles, what
are the prospects for enduring comprehensive health care
reform? In the short term, the chances are virtually nil. Until
2009 the United States willbe ruledby anunpopular, doctrinaire
Republican president and a narrowly elected Democratic
congress with no clear mandate except opposition to the Iraq war.
Divided government is unlikely to enact anything so complex
and controversial as comprehensive health care reform. Even
the next administration, be it Democratic or Republican, will
have its hands full with foreign policy problems: withdrawal
from Iraq and Afghanistan, containment of Iran and North
Korea, negotiations with Russia, and rebuilding alliances with
friendly nations. The executive and legislative branches will
have little time or political capital to spend on major health
care reform for the rest of this decade.
Over the intermediate term. Over the intermediate
termâ€”say, five to ten yearsâ€”it is more likely that health policy
will come to the fore, but even then the prospects for enduring
comprehensive reform are no better than fiftyfifty unless
the nationwere to face amajor economic, political, social, or
public health crisis. In that case, the chances for reform would
rise dramatically. The danger is that a reformpackage hastily
crafted and enacted in a time of crisis might not have the
ingredients to make it enduring.
One development that would make reform more attainable
is a split among the â€œspecial interests.â€ There may come a time
when the large integrated health plans and major insurance
companies will see no advantage in fighting to preserve the
opportunity for hundreds of small insurance companies to
continue in business. A split in the business community (of
which signs are already appearing) will produce many leaders
who see little point in trying to preserve employment-based
insurance. There may also come a time when most physicians
and hospital administrators, fed up with the present chaotic,
costly system, will say, â€œThere must be a better way to pay for
Long-term prospects. Over the long term,major reformis
practically inevitable. No nation can continue to allow health
care to drain away resources that would be more socially
productive in education, the environment, security, and other
policy areas. It will come sooner rather than later if policymakers
recognize that the United States must find its own approach,
one that is congruent with basic American values: equality of
opportunity combined with exercise of personal freedom.
Victor Fuchs ([email protected]) is theHenry J.Kaiser Jr. Professor
Emeritus at StanfordUniversity in California and a research associate at
theNational Bureau of EconomicResearch.
Financial support from theRobertWood Johnson Foundation (RWJF) is gratefully
acknowledged. This is an originalwork byVictor Fuchs and reflects his views only,
not those of theRWJF.
1. D. Kahneman and A. Tversky, â€œProspect Theory: An Analysis of
Decision under Risk,â€ Econometrica 46, no. 2 (1979): 263â€“292.
2. D.S. Hirschfield, The Lost Reform: The Campaign for Compulsory Health
Insurance in the United States from 1932 to 1943 (Cambridge, Mass.:
Harvard University Press, 1970).
E SSEN T IAL ELEM EN T S O F A T ECH N O LO G Y AN D O U TCO M E S A SSE SSM EN T I N I T IAT I V E | 33
The mismatch between us health expenditures and the
resources devoted to learning which health interventions
are most effective is both striking and unwise. Each year US
individuals spend more than $2 trillion on health care.1
than $100 billion is spent for research and development and
for regulatory approval of new technologies. Yet total spending
on technology assessment almost certainly falls short of $1
billion per yearâ€”0.05% of all US health care spending.
Some of the $2 trillion in health care expenditures buys
services of little or no value. This waste has been attributed to
misleading advertisements, media hype, misguided state and
federal mandates, fear of malpractice litigation, misaligned
reimbursement incentives, and generous insurance that
encourages patients to ignore the cost of services.2-4 Efforts to
curb the inappropriate use of medical technologies, however,
can have only limited success unless they address the paucity
of reliable information about their benefits, cost, and value.
For decades, calls for more systematic assessment of medical
technologies and outcomes have gone unheeded.5-7 Recently,
however, federal legislators and officials have recognized that
better information is imperative. The Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 mandated
research on â€œoutcomes, comparative clinical effectiveness,
and appropriateness of health care.â€8
The former Medicare
administrator, Gail Wilensky, has described alternative structures
for a technology assessment organization.9
senators, and presidential candidate have supported legislation
to fund comparative effectiveness initiatives.10
Renewed interest in technology and outcomes assessment
efforts can be traced to several factors: disillusionment with
traditional cost-containment approaches, deepening anxiety
about the safety and effectiveness of drugs and medical care,
recognition that little is known about the optimal use of existing
diagnostic procedures and treatments, and the explosion in
health care expenditures anticipated as baby boomers age. By
2015, the number of US individuals in their 60sâ€”a decade
of heavy use of medical careâ€”will increase by nearly 50%.
Simultaneously, because of scientific advances, many new
technologies will enter clinical practice. The combination of
new technologies and greater use of older medical interventions
are the fundamental drivers of increasing health care costs.
Increasing health care costs have induced employers and
insurance companies to shift more financial responsibility
onto individuals through â€œconsumer-directedâ€ health plans
and health savings accounts.11 In addition, private health
plans, Medicare, and Medicaid are likely to urge hospitals and
clinicians to become agents of cost control. Essential to these
efforts to enhance quality and lower costs is comprehensive,
objective information about the absolute and relative costs
and benefits of medical interventions.
Technology assessment in the United States has been
hampered by pressure and limited resources. In the early 1990s,
key federal agencies dedicated to technology assessment, such
as the Congressional Office of Technology Assessment, were
eliminated. Efforts by other federal agencies are fragmented and
underfunded. The Department of Veterans Affairs, the National
Institutes of Health, and the Centers for Medicare & Medicaid
Services have little money for technology assessment.12
The mission of the Agency for Healthcare Policy and
Research (AHCPR) was technology and outcomes evaluation.
But, in 1994, when the AHCPR sponsored research showing
that there was inadequate evidence to support commonly
performed back operations, its funding was almost eliminated
at the behest of disgruntled orthopedic and neurosurgeons
and congressional critics of the Clinton health plan.13 While
AHCPR survived, it was chastened. Its name was changed to the
Agency for Healthcare Research and Quality and it has generally
avoided controversial issues. Most importantly, little of its small
Essential Elements of a Technology and Outcomes
By Ezekiel J. Emanuel, MD, PhD, Victor R. Fuchs, PhD, and Alan M. Garber, MD, PhD
Reprinted with permission from the Journal of the American Medical Association. September, 2007.
34 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
budgetâ€”$320 millionâ€”is dedicated to evaluative research.12
State and private technology evaluation activities supplement
federal efforts. In 1985, the Blue Cross and Blue Shield
Association established the Technology Evaluation Center â€œfor
assessing medical technologies through comprehensive reviews
of clinical evidence.â€14 The Drug Effectiveness Review Project
â€œis a collaboration of organizations [including 13 states] that
have joined together to obtain the best available evidence on
effectiveness and safety comparisons between drugs in the same
class, and to apply the information to public policy and decision
makingâ€ especially for Medicaid coverage.15 Private corporations
provide similar information for purchasers. Physician specialty
societies undertake increasingly sophisticated medical
technology assessments and issue rigorous guidelines.
While commendable, these efforts are not equal to the
problem. Their sponsors understandably focus on their own
needs and priorities, which are largely uncoordinated and
far from comprehensive. That is to be expected. Technology
evaluations are a public goodâ€”they can benefit everyone,
not only the organizations that bear the costsâ€”creating
disincentives for groups to invest in them.
Essential Elements of an Effective
Medical Technology and Outcomes
Technology evaluations in health care can provoke
controversy, anger, and hostility. A suggestion that a popular or
expensive treatment is minimally effective or lacks data on longterm risks could be inimical to the interests of manufacturers,
advocacy organizations, physician groups, or other groups, and
will be received accordingly. To avoid political opposition, any
agency concerned about its future might eschew analysis of
topics that affect powerful companies or a large number of
patients or clinicians and about which there is considerable
uncertainty. In other words, it might avoid the very questions
that most need answering.
To mitigate such concerns and facilitate the creation of
objective information, any new technology assessment initiative
must include 6 features: administrative independence; dedicated
funding; production of objective and timely research; use of
reliable methods; widespread dissemination; and a governance
and organizational structure that lend it legitimacy.16-18
Administrative Independence. Any technology and
outcomes assessment initiative must balance accountability
with the ability to pursue the long-term good of the public
without inappropriate interference. The Federal Reserve Board
is the preeminent model for such administrative independence.19
It conducts monetary operations and is often considered to
be the federal agency with the most significant influence on
the economy. Because it creates winners and losers, the Fedâ€™s
decisions are inevitably controversial. Yet the Fed generally
avoids the perception of favoritism.
What generates the Fedâ€™s independence? It is a
semiautonomous agency whose leaders are appointed for
multiyear terms and cannot be removed at will; its staff are
highly trained professionals who conduct independent, objective
research to inform decisions; and its leaders regularly brief
Congress.19 These characteristics are essential for a technology
Dedicated Funding. Annual congressional appropriations,
which determine the budgets for most federal agencies, are
discretionary. Such funding makes agencies vulnerable to
political retaliation whenever they issue controversial decisions.13
Conversely, the Fed does not depend on annual congressional
appropriations.19 Similar dedicated funding is necessary to
ensure that a program on technology and outcomes assessment
could pursue research without fear of intimidation by powerful
Funding obtained by imposing a fee on all health
expenditures would offer not only stability but fairness, placing
the cost for such an initiative on the beneficiaries of its work.
Such a fee could be imposed only on health expenditures that
are not subject to other taxesâ€”employer-based insurance,
Medicare and Medicaid benefits.
Moreover, a substantial funding commitment is needed to
conduct a comprehensive set of rigorous assessments rapidly,
and to be able to undertake original research and clinical
trials. Britainâ€™s National Institute of Health and Clinical
Effectiveness (NICE) is often lauded as a model of rigorous
evaluation of technologies but is also criticized for its slow
pace.18 In part, this is a consequence of NICEâ€™s limited size and
budgetâ€”little more than 200 employees with a budget of just
over $50 million. High-quality work can be done quickly only
if the resources equal the task.
High-Impact Research. A credible technology and
outcomes assessment initiative must have a well-defined
mission: to assess the effectiveness, comparative effectiveness,
cost, and cost-effectiveness of drugs, devices, diagnostic tests,
medical practices, and procedures as actually implemented in
the real world. The technologies being evaluated should be
commonly used, of high individual or aggregate cost, subject
to rapid change, or for which there are many alternatives
and substantial uncertainty about which intervention should
be used for which patient population. Topics that might be
pursued include the best treatments for metastatic colorectal
cancer and multiple sclerosis.
E SSEN T IAL ELEM EN T S O F A T ECH N O LO G Y AN D O U TCO M E S A SSE SSM EN T I N I T IAT I V E | 35
Any initiative should systematically and comprehensively
assemble and analyze published and unpublished data,
including population and clinical databases. Assessing the
overall effect of different care processes as actually practiced
also will be important. However, it will often be necessary to
sponsor clinical trials and other types of research to generate
new data for evaluations.
Trustworthy Methods. A permanent advisory board
of distinguished methodologists is necessary to ensure the
adherence to validated research methods and dissemination of
objective results. A methodology advisory board would be able to
resolve methodological controversies and oversee the refinement
and development of new methods when appropriate.
Dissemination. Effective communicationâ€”of both cost
and effectiveness informationâ€”is necessary to ensure the
widespread and appropriate implementation of the results of
technology and outcomes evaluations.15,17 The initiative must
integrate diverse evaluations and communicate well with
professional stakeholders, industry, physicians, and the general
public. This requires the development of a standard reporting
format for effectiveness evaluations, and the implementation
of a formal review process before the final release of official
reports. The review should include both internal evaluations
and external commentaries.
In Britain, the results of NICE evaluations are binding on
the National Health Service.18 In the current US health care
system, binding coverage or medical necessity determinations
from a new assessment initiative are neither feasible nor
desirable. However, technology and outcomes assessments
must directly address the key questions faced by government
payers, such as the Centers for Medicare & Medicaid Services,
health plans, and professional societies. The evaluations will
be particularly important because they are objective and
authoritative, and are not produced by a body with direct
financial interest in the findings. A critical test is whether
practices consistent with the evaluations are sustained as
standard of care in litigation.
Legitimacy. Critical to ensuring independence, objectivity,
relevance, wide dissemination, and especially legitimacy of
the process is a permanent stakeholder advisory board that
includes representatives of patients, insurers, employers,
physicians, other clinicians, and federal agencies, as well as
drug and device manufacturers. Important stakeholders must
be engaged in selecting technologies for evaluation, designing
studies, and interpreting and disseminating results. Having key
stakeholders involved in a transparent process, even one that
may generate research results contrary to their interests, will
foster greater support for the process, methods, and results.
Technology Assessment and Innovation
Manufacturers of medical technologies, along with many
physicians, frequently criticize systematic technology assessment
initiatives as a barrier to medical innovation. Their concerns
often find expression in rhetoric that conflates new with
innovative and latest with best.
20 However, novelty cannot be
equated with benefit. An interventionâ€™s value resides in its ability
to reduce mortality, morbidity, or save money, not in its unique
mechanism of action. What is needed is better information on
whether new tests and treatments really do improve health,
how the improvement compares with the effects of currently
available tests and treatments, and at what incremental cost.
Better information about effectiveness and costs will almost
certainly redirect manufacturersâ€™ research and development
activities. But redirection is not restriction. New interventions
that offer substantial value will be rewarded with high demand
and prices commensurate with their benefitsâ€”providing strong
incentives for research and development. Conversely, new products
that offer no or only incremental benefits will not command high
prices. In medical care, as in other industries, new products that
cannot prove their worth should not be assured of market success.
Those that can should be rewarded generously.
A new technology assessment initiative built on administrative
independence, dedicated funding, reliable research, trustworthy
methods, wide dissemination, and legitimacy will offer a
solid foundation for efforts to balance the benefits of medical
technologies and the costs that result from their adoption. But
information alone will not be sufficient. Information must be tied
to appropriate infrastructure and financial incentives to affect
medical practice. Health plans need appropriate incentives to
use the information in their coverage decisions. Hospitals and
physicians will need incentives to use the information in their
treatment decisions. Simultaneously, evaluative research can
guide incentives, insurance benefits, and the organization of
care, ensuring that efforts to control costs and improve care are
firmly grounded in the best evidence. In an era of increasing
costs and growing complexity of care, few health initiatives
are as important as a substantial program in the evaluation of
medical technology and outcomes.
Author Affiliations: Department of Bioethics, Clinical Center, National
Institutes of Health, Bethesda, Maryland (Dr Emanuel); Department of
Economics (Dr Fuchs) and Center for Health Policy (Dr Garber), Stanford
University, Palo Alto, California; and VA Palo Alto Health Care System, Palo
Alto, California (Dr Garber). Corresponding Author: Ezekiel J. Emanuel, MD,
PhD, Department of Bioethics, Clinical Center, National Institutes of Health,
Bldg 10, Room 1C118, Bethesda, MD 20892 ([email protected]).
Financial Disclosures: None reported.
Funding/Support: Blue Shield of California Foundation and the Robert Wood
Johnson Foundation provided support for this research.
36 | H E A LT H C A R E R E FO R M I N T H E U N I T E D S TAT E S
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