over $100 billion in the health field. The issue is how to share these costs-not whether we "can afford" national health insurance. If payment for care comes out of many sources out of pocket as well as insurance we do not lower the total costs of health care, but we do increase the total costs of administration. The goal of equity and of low administrative costs is best achieved by departing from the fragmented and categorical approaches of earlier days, approaches which have contributed to our present difficulties.

7. The financing and provision of medical care is "organized" in a highly fragmented manner; that is, out-of-pocket direct payments, private insurance, social insurance (medicare), public payment for costs of services (medicaid), public provision of services (VA). Different patterns apply to various individuals who must be sorted into the "appropriate" program by a host of variables such as age, employment status, income, medical condition. This fragmented approach is superimposed on fragmentation in regard to which services are covered and to what degree. The system's energies and priorities cannot be redirected, given the existing complex patterns of finance. In a sense, the system is both inequitable and out of control, and present economic arrangements underwrite and validate the explosive situation. One key difficulty is that the medical care system does not face an effective budget constraint that would lead to a considered allocation of scarce resources on the basis of potential benefits and cosnumer preferences. The medical care system does not face the discipline imposed by competitive market forces or the discipline of planning. A program that provides for equitable access can be structured to provide for effective control of expenditures. Without such structure, we will continue to watch medical care costs escalate.

Each of these points and others could be elaborated upon. These limited remarks, therefore, do not represent a complete discussion of the issues involved in national health insurance. Nevertheless, in order for my colleagues on this panel to present their views, I must conclude my remarks. Let me briefly summarize the issues that I have mentioned:

1. The key to system performance and system orientation is the physician.

2. The physician is heavily influenced by existing fiancing arrangements and their characteristics.

3. These arrangements have stressed payment for hospital services and have worked to the detriment of other modalities of care.

4. They have also worked to the detriment of those who do not have third-party protection.

5. The fragmented nature of third-party payment systems has reinforced inequity, inhibited system reform, and prevented effective cost control.

The complex nature of the health care economy has made action on national health insurance difficult. It has also made it necessary. None of us underestimates the problems that you face. We are equally certain that you do not underestimate the problems that the public faces.

Let me add one point that arises out of the remarks that have already been made and is not in my prepared text. I will do so very briefly, because I assume it is something we will be discussing.

The word "equity" has not at this point-because we have been describing the system-entered into the discussion in a heavy manner. But it would be fair to note that the perspective I bring to the discussion, and from which I speak, is a perspective that heavily stresses the need for national health insurance, not only because it seems to me that this provides a mechanism for redirecting some of the energies of the medical care system, but because above all, it provides something which I think, is the hall mark of a civilized society, namely, a sharing of the medical care cost so that people are not rationed into the system on the basis of their income on a matter as important as health.

Thank you, Mr. Chairman.

Mr. ROSTENKOWSKI. Thank you, Professor.
Professor Reinhardt?

STATEMENT OF UWE REINHARDT

Mr. REINHARDT. Mr. Chairman, it is a privilege and a pleasure to join with you, the Members of your committee, and this panel in a discussion of issues surrounding the introduction of national health insurance in the United States. By its very nature, such a system will alter the financial flows accompanying the delivery of health services and thereby the economic incentives and constraints confronting the consumers and the providers of health services. One need not be a cardcarrying economist to appreciate the fact that these financial factors tend to influence the performance of the health care system significantly. The designers of the Nation's future health insurance system therefore have the opportunity to do much good-or to do much harm.

You and your committee are to be commended for your decision to precede legislative action on this issue with a series of relatively unstructured roundtable discussion. I trust that my colleagues on the panel join me in the hope that we, as perennial students of the health system, may be able to provide you with useful perspective on the American health care system. I am certain that, as a faculty member in a school of public affairs, I shall benefit personally from participating in your deliberations.

My objective today is not to propose a particular health insurance program, and I do not have a particular point of view I would like to push. Rather, I understood my mandate to be to think about a general framework in terms of which the design of the national health insurance could be developed, and, in the process, to comment on the current health care system which as we have already heard, that system is sometimes referred to as a non-system, as a mess, as a source of perennial crisis, or the worst system in the world. Whether or not these allegations are valid is one conclusion you will have to reach after our deliberations. I shall offer my thoughts on this question in a moment. In thinking about designing a national health insurance system one could have three distinct objectives in mind.

The first objective would be to design a system simply to be a bona fide health insurance system, the purpose of which would be to protect individuals from catastrophic financial loss associated with illness.

A second objective could be to design the system as a redistributive mechanism that channels purchasing power for health service from middle- and upper-income families to lower-income families and, in

so doing, redistributes available medical services in like manner. This is the point Professor Fein raised in his concluding remarks, namely, that you could stress equity as the main objective of the system.

A third objective for a national health insurance system might be to design the system as a set of financial and administrative levers through which the public sector, or those who run the public sector, can reshape the organization of health care production and delivery in this country. There are quite a few commentators who would like to see health insurance so developed and so used.

To run ahead of my arguments, I would recommend that, in thinking about this issue, Congress' focus on objectives 1 and 2 which do go hand in hand—and leave aside objective 3 for a number of reasons.

A. We don't really know exactly what it is we would like to achieve by moving these policy levers, even if they worked; and

B. We have absolutely no assurance that these levers would in fact work in the desired manner. We do, however, have a fair amount of evidence, when we look abroad to other countries, that these policy levers often work in a perverse manner.

I mentioned that the three objectives may be posed singly or jointly as a package. The point to note is that even if all three objectives are put together into one package, different commentators would give them different relative weights individually. Implicit in each particular weighting scheme would be a particular set of views of what is right ad what is wrong with the current health care delivery system and the current health insurance system in the United States.

I cannot stress sufficiently that such views are very often heavily subjective and depend on particular interpretations of a body of evidence at which all of us look, but, as we all know, on which no two social scientists ever can agree. Because these views are so subjective, the collection of experts that will join you in your deliberations are inevitably going to leave you with a sense of unresolved controversy. I would just like to warn you that such an outcome would not necessarily be an indication of failure of these proceedings.

Now, let me briefly talk about these three objectives, because implicit in them, as I mentioned, are assumptions and perspectives on the American health care system.

Those who would stress Objective 1-including a number of persons who will come before you, some of whom are well-known economistsfeel that there is basically nothing seriously wrong with the delivery system, or, if it is, that health insurance is not the vehicle through which to alter the system.

They do, however, feel that there is something wrong with the American health insurance system as distinct from the health delivery system. The mosaic of public and private insurance schemes we have in this country, they feel, has failed at least some segments of society. Why else, may I ask, would the Nation feel a need for introducing a publicly sponsored health insurance system? Implicit in that proposed legislation is the allegation that private health insurance has failed society somehow. There are two reasons for which it could be said to have failed.

First, given the income distribution in this Nation, some families. simply cannot afford to buy health insurance even if it were made avail

able to them at actuarially fair premia. (Actuarially fair premia means that one pays roughly what the average expenditure on a family would be.) Clearly, the fact that the income distribution is such that families cannot afford health insurance does not indicate a failure on the part of the health insurance industry, and the problem could certainly be solved through income redistribution.

There is another problem that can be more properly traced to the health insurance industry in this country. I propose on page 3 of my formal statement that a useful exercise for this committee might be to go through a typical health insurance policy of the sort now being marketed in this country, to imagine a variety of different illness scenarios and then to determine, without expert advice, precisely what the coverage is under the policy. I would suggest that you will find this exercise to be excruciating, as do many American citizens today. The health insurance industry will undobutedly defend itself on the argument that the embroidering of its policies with exclusions and provisos is designed to accommodate a desire for efficiency, and I accept that argument. I do, however, also argue that whatever efficiencies you purchase in this manner are likely to be purchased at a very high price. First, there is the real possibility that many Americans purchase totally inappropriate health insurance coverage on highly mistaken beliefs about the maximum risks to which they are exposed. You will, without any doubt, be exposed to a famous experiment at the University of Pennsylvania where a good health insurance package had been designed that provided for coinsurance and deductibles, and yet presumably highly educated faculty members bought first dollar coverage. This is often cited as evidence of irrationality. I believe that it was not evidence of that. It was evidence of ignorance, I suspect, and ignorance is quite an excusable trait even among professors. I suggest that these faculty members did not know the maximum risks to which they were actually exposed and were motivated to insure themselves for much higher imagined risks than those to which they were truly exposed.

Therefore, I have, in the fattest letters I could find on the typewriter, recommended in my statement that:

Whatever Congress does after its deliberations in the area of health insurance, it is to be hoped that it will present to the American people health insurance options or policies that are readily understood by the average person, that explains to the average person the maximum liability to which he or she is exposed, even if such an approach involves some inefficiencies.

Many experts to appear before this committee will argue for coinsurance and deductibles, or what is generically referred to as "cost sharing" on the part of patients. The hypothesis here is that it is the patient who is central to the health care consumption decision and that, if the patient shares in the costs of these decisions, these decisions will be made rationally and efficiently.

I cannot, at this stage, launch into this controversial subject matter. I would not agree with some of my colleagues-and clearly an economist should not agree with the proposition-that the decisions in health care consumption are made only by physicians. I do believe that coinsurance would reduce the consumption of health care in this Nation. However, in deciding whether or not to introduce coinsurance

features in this Nation's health insurance legislation, one must be aware of a number of points that really don't pop out of our microeconomic textbooks.

The first point is this. The objectives being pursued with cost sharing are not likely to be reached in this country, if only a narrow stratum of the population-présumably lower income families-are exposed to cost sharing, while upper income and middle income families and particularly the members of trade unions, manage to avail themselves of first dollar coverage. In this case, perhaps only 10 percent of the American people face coinsurance, and the effort to economize over the whole system is focused on that narrow stratum of the population. Such a system would not only be unfair, but it would not work. Congress might toy with the idea of prohibiting first dollar coverage altogether. I can't imagine how you could do that in the face of the strong objections from the interested parties you are likely to encounter, so I won't dwell on this point.

Second, a system of coinsurance and deductible is likely to be worth its cost only if it can be relatively easily administered. One could certainly design a system of coinsurance and deductibles that would eliminate unemployment in this country altogether simply by creating a large bureaucracy to administer the system. In fact, such system may not be worth its cost.

Third, as already mentioned, a system of coinsurance and deductibles is likely to be self-defeating if it is so complex as to generate enormous psychic costs of uncertainty on the part of the insured. It is generally assumed by economists and everyone else that people suffer from uncertainty, and those psychic costs are very real even if they are not expressed in monetary terms. So, I would like to suggest some caution on a system of coinsurance and deductibles, although as an economist I certainly believe they could be used to reduce health care consumption and hence health care costs.

I would finally like to offer some observations on the assertion that there is nothing amiss in the American health care system.

Later on in my formal remarks, on pages 11 through 13, I list a veritable catalog of complaints that have been lodged against the American health system at one point or another. The list of these complaints is long and varied. On closer examination, many of these complaints are based on value judgments and peculiar interpretation of available data. This being so, some observers of the American health system have sought to reject the current criticism of that system altogether by insisting that ours is the finest health care system in the world.

One point to note here, of course, is that, even if one has the finest health care system in the world, one cannot necessarily argue that one ought not to make such improvements which are feasible. It is also within the domain of public policy to speed those improvements.

But the people who defend the American system may indeed have a point, and I wish to speak to that, because there will again be many people who will come before you who consider ours to be the worst health-care system in the world. We have humbled ourselves considerably before the rest of the world by pointing to infant mortality rates and maternal death rates, on which statistics we rank roughly