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vinced that action is required if all the American public is to receive its full money's worth for the over $100 billion spent in the health sector look forward to your deliberations.

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In the interests of allowing a maximum opportunity for questions and answers, my prepared remarks are very brief. I have outlined a few major points that may help provide a framework for discussion of the goals and mechanisms of a national health insurance program. 1. The economics of the medical care sector is unlike that of other sectors. We are led astray if we apply the tools of conventional economic analysis: assumptions concerning the goal of profit maximization, assumptions concerning competition consumer sovereignty, and so forth. The medical care system has developed patterns of behavior and of decisionmaking, patterns of resource allocation and funding that set health care services apart from other economic activities. All economic sectors have their own special characteristics, but the health sector is more "special" than others. Perhaps the most critical element of difference is that the key decisionmaker in the medical care drama is the producer (physician); not the consumer (patient). To focus on patient decisions is to misdirect our attention. Patients do not enter or leave a hospital, do not buy drugs, order tests, or elect surgery except as physicians decide for them that they shall consume these goods or services.

While only 21 percent of the $90 billion spent for personal health care is accounted for by physicians' services, the physician "controls" the level of expenditure for other major parts of the health care sector; for example, the $41 billion for hospital care. It is the physician who, in large measure, decides what and how much care shall be consumed. Financing programs that are designed to affect consumer behavior—say, via cost-sharing mechanisms-miss the essential point: it is producer behavior that is at issue. It is the physician, not the patient, who is making the critical and costly consumption decisions. 2. It is a fallacy to imagine that physicians make decisions solely on the basis of "scientific" considerations. Many variables, including economic relationships, affect choices. Medical care services can be produced in different ways, utilizing various combinations of resources. The choices-which services, where offered, for whom-are not determined by medical science alone. They are affected by payment mechanisms, economic incentives and penalties, reimbursement formulas-by the nuts and bolts of insurance contracts, Government regulations, et cetera. If public or insurance dollars are available to pay for certain services-for example hospital care-rather than for other-for example, preventive care-the system will emphasize the former. Physicians and institutions respond to the availability of various resources and to the existing patterns of financial coverage. There is no "neutral" financing program. The issue of the range and scope of benefits, thus, becomes more than an issue of financial protection. It lies at the heart of the resource allocation problem. It affects the direction and costs of the system.

3. Historical developments have emphasized insurance protection for hospital expenses. This is fully understandable since these are the high pricetag items, and both patients and hospitals needed the financial protection. Nevertheless, it is a fundamental error to believe that

all that hospital insurance did was: (1) To offer financial protection, and (2) to permit some persons who required hospitalization to enter the marketplace and obtain these services. We also "force-fed" the hospital sector. We have paid, are paying, and will continue to pay a high price as a result of our emphasis on hospital care. We must avoid the error of believing that the care we finance in the future and the way we finance it will not help shape system response. What you will give priority to in defining a national health insurance program will determine the priorities of the system itself. That, for example, is the reason that many observers, and I include myself here, believe that that which is sometimes termed catastrophic health insurance would be just that-catastrophic.

4. Just as covering some services but not others has not been neutral to the "uncovered" elements of medical care, so the presence of thirdparty payment for some persons has not been neutral to those without it. Many Americans have no private insurance or coverage through public programs. Those without coverage tend to be the economically vulnerable; for example, persons with marginal or irregular employment, or with low incomes. These individuals face a medical care system whose behavior is influenced by the fact that others have insurance. It is not only that producers prefer to serve those for whom payment is guaranteed. It is also the case that those without protection enter a system whose price levels, standards, and orientation have responded to the presence of insurance. Those without protection become doubly disadvantaged.

5. Insurance coverage meets many needs. For the producer of services it means a guarantee of payment. To patients and potential patients it means the sharing of financial risk and the opportunity to budget. The former point (risk sharing) is self-evident. The latter point, however, has a special, dynamic consequence. Because of the desire for budgeting, consumers will attempt to insure themselves against extremely high deductibles. Thus, the attempt to erect significant cost barriers in order to bring economic "discipline" to decisionmaking will fail as those who have the economic resources to purchase insurance to cover the deductible will do so. In turn, we would reenter the world of inequity-the world in which some have and others lack protection, the world in which some utilize preventive care services since "they are already paid for" while others postpone care, hoping to avoid the dollar expenditure.

6. The historical development of third-party payment mechanisms has not stressed the achievement of equity or the translation of the concept of access to medical care into operational reality. While, today, there seems to be significant agreement that the uilization of medical care services should not depend on an individual's income, there is still disagreement on specifics and on mechanisms to assure this right: shall a program be universal, shall it cover all services, shall it provide firstdollar coverage? In considering alternative operational answers to these questions, we must remember to assess the administrative costs associated with "refinements." The less comprehensive the range of covered services, the less complete the dollar protection, the less universal the program, the greater the burden of administrative costs. Nor do such mechanisms reduce total costs. We are already spending

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

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