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 discussions. 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 perspectives 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. A number of distinct objectives could be posed for a national health insurance system, namely: Objective 1: The system is to be designed as a bona fide insurance scheme introduced to protect individuals from catastrophic financial losses associated with illness. Objective 2: The system is to be designed as a redistributive mechanism that channels purchasing power for health services from middle and upper income families to lower income families and, in so doing, redistributes available or projected health services in like manner. Objective 3: The system is to be designed as a set of financial and administrative levers through which the public sector can reshape the organization of health-care production and delivery. These objectives may be posed singly or jointly. The point to note is that, even if all three objectives were proposed side by side, different commentators would give them different relative weights individually. Implicit in each particular weighting of the objectives would be a particular set of views of what is right and what is wrong with the current health-care delivery and health insurance systems. Such views are, unforunately, rather subjective. The collection of experts invited to discourse with you on this topic is therefore likely to leave you with a sense of unresolved controversy. OBJECTIVE 1 AND ITS UNDERLYING ASSUMPTIONS ABOUT Those who stress objective 1, perhaps to the exclusion of the other two, appear to assume either that the current health delivery system is not in need of a Failure of the existing health insurance system to serve society well can be effected through a health insurance system. By posing the objective, however, one does assert that the current health insurance system in this country-the mosaic of private and public insurance schemes-has failed large segments of society. Why else, one may ask, would the nation need to introduce a publicly sponsored, bona fide health insurance system in the first place? Failure of the existing health insurance system to serve society well can be traced to at least two prime causes. First, one would expect that many low-income families would find it impossible to finance the premiums for adequate health insurance coverage, even if these premiums were actuarially fair (that is, were on average as high as the average outlay insurance companies would have to make for such families). This aspect of the problem cannot fairly be laid to the doorstep of the nation's insurance industry. It is a problem that has its root cause in the nation's overall income distribution. The proper remedy clearly lies in altering that income distribution, either through a negative-income tax scheme, or at least through public subsidies toward the health insurance premiums of low-income families. A second source of inadequate health insurance coverage, however, can be more properly traced to the insurance industry itself. A useful exercise for this Committee might be to go through a typical health insurance policy of the sort now being marketed, to imagine a variety of different illness scenarios, and to infer from the policy, without expert advice, precisely what the extent of coverage is for the various hypothesized illness episodes. One suspects that the Committee would find this an excruciating task, as does the typical American citizen. The health-insurance industry will undoubtedly argue that the many riders, exclusions and provisos embroidering its policies are designed to accommodate a desire for efficiency. It can be argued, however, that whatever efficiency is so purchased is likely to be purchased at an inordinate price. First, there is the real possibility that many Americans ultimately purchase inappropriate insurance coverage on the basis of mistaken impressions. The fact that many Americans purchase first-dollar coverage at premiums quite out of proportion with the maximum loss exposure they actually face is consistent with that hypothesis. One suspects that persons making these insurance acquisitions seek to protect themselves against much higher imagined risks, an impression that is likely to have been fostered by the complexity of their healthinsurance policies. An added price is paid for this complexity, namely, the uncertainty it creates in the mind of consumers. Standard economic theory and empirical research suggests that uncertainty usually creates disutility (unhappiness) among individuals. Indeed, to eliminate the uncertainty surrounding health-insurance coverage some observers have advocated an insurance system without any copayment whatsoever on the part of the consumer, fully recognizing that so generous a policy may induce some unwarranted increases in health-care consumption. Whatever Congress, after its deliberations, decides to legislate in the area of health insurance, it is to be hoped that it will present Americans with health insurance options (policies) that are readily understood by the average person, even if such an approach involves some inefficiency at the margin. Those who view objective 1 as the prime goal of a national health insurance system generally favor a system of deductibles and coinsurance borne by the consumer of health services at the time of consumption. Advocacy of cost sharing rests on the supposition that the demand for many types of health services is "price elastic," that is, sensitive to the out-of-pocket expenses consumers pay at the point of consumption. By forcing consumers to participate directly in the cost of health services, one hopes to reduce what the insurance industry refers to as "moral hazard" and is interpreted to be "unwarranted consumption of insured services," with the accent on unwarranted. This is not an occasion to launch at length into that controversial subject matter. (See, however, a paper entitled "On the Benefit Structure of National Health Insurance," left with the Committee's staff.) Several pertinent observations may nevertheless be offered. First, the objectives being pursued with cost-sharing are not likely to be reached if only a narrow stratum of the population (presumably lower-income families) are effectively exposed to cost sharing, while upper- and middle-income families, and particularly members of trade unions, have first-dollar coverage. To eliminate this possibility, Congress might toy with the idea of prohibiting first-dollar coverage altogether, although one doubts that such a stricture could be legislated over the objection of interested parties. An alternative would be to alter the tax laws so that all insurance premiums paid by a household (or paid by employers on behalf of the household) must come out of after-tax income. Interested parties (the insurance industry and labor unions) would be likely to object to such a change as well, but the measure might stand a chance of passage. Second, a system of coinsurance and deductibles is likely to be worth its cost only if it can be relatively easily administered. Third, as already mentioned, a system of coinsurance and deductibles is likely to generate considerable psychic costs of uncertainty unless that system is easily understood by consumers and the latter can easily infer the maximum risk to which they are exposed. A few observations may be in order on the putative assertion that there is nothing serious amiss in the American health-care delivery system. As will be seen further on, the catalogue of frequently voiced complaints against the present system is long and varied. On closer examination, many of these complaints involve value judgments or differences in the interpretation of available evidence. This being so, some observers of the American health system have sought to reject the recurrent criticism of that system out of hand by insisting that ours is "the finest health-care system in the world." (One must, of course, observe immediately that even the "finest health-care system in the world" may still be 1 I am referring here to the much cited instance in which faculty members at the University of Pennsylvania bought first-dollar coverage for very low maximum risk exposure an instance often cited to demonstrate a strain of irrationality even among the educated. M argument is, pure and simple, that ignorance rather than irrationality explains the incident. able to accommodate improvements, and that it is certainly within the domain of public policy to speed whatever improvements seem feasible.) Many of the system's ardent defenders are the parties who have a vested stake in alleging a superior track record. Their statements ought therefore to be taken with the appropriate grains of salt, as everyone in this room surely knows. There may, however, be something to the point that Americans have been far too swift in humbling themselves before the rest of the world-that other nations that have gone down many of the allegedly remedial avenues now being proposed in this country have failed to compile a health-status record even as good as ours. An interesting case in point is the health system of West Germany. (A paper describing that system has been left with the Committee's staff.) Residents of that nation have for many decades enjoyed virtually universal, comprehensive health-insurance coverage without any cost-sharing on the part of the insured. By and large, that nation's health-care delivery system is similar to ours, although hospital-based physicians are salaried and private physicians have no hospitalized patients. Remarkably, West Germany fares considerably worse on such widely used health status indicators as infant mortality rates and maternal death rates. (See the tables appended hereto.) Indeed, on the latter statistic the West German average is roughly equal to the shockingly high ratio reserved for the non-white community in this country. The point of the preceding paragraph is not to assert that the West German health system has failed society or to imply that no improvements are feasible in our system. The point has simply been to raise the caveat that health services are not the only input into the production of a nation's health status, and that the introduction of health-insurance coverage in this country, a redistribution of access to health services, and even a drastic reorganization of the American health-care delivery system may or may not trigger marked improvements in those indicators of health status on which Americans have so long condemned themselves, or generate many of the benefits expected from these changes. OBJECTIVE 2 AND ITS UNDERLYING ASSUMPTIONS An alternative, single motive for the introduction of national health insurance might be simply to place into the hands of low-income families the financial wherewithal to purchase adequate health services and to redistribute the overall costs of illness in the nation from those afflicted with illness to those blessed by good health. A compulsory, universal and comprehensive health-insurance system with premiums that are unrelated to the risk represented by insured individuals would accomplish that objective. (A sufficiently generous income redistribution system, such as a negative income tax, might be designed to achieve that objective as well. The fear here might be that the poor would not necessarily spend these transfer payments on health services in the manner intended by policymakers.) Strictly speaking, one could view this objective as the most important mandate for national health insurance and still adhere to the supposition that there is nothing inherently wrong with the organization of the nation's health-care delivery system as such. One could even believe that the nation's existing health insurance industry has a spotless record. (A private health insurance industry would, of course, naturally tend to categorize individuals by actuarial risk class and set premia accordingly.) With some necessary oversimplification, the Canadian and West German health-insurance systems can be said to have been erected on primarily these notions. These systems are not bona fide insurance systems, nor do they seek to intervene purposefully into the organization of health-care delivery. Implicit in the proposition of objective 2 is the assumption that lack of ability to pay for health services serves as an important barrier to adequate health care. That assumption in turn implies that one holds the demand for many types of health services to be price-elastic (sensitive to the out-of-pocket expenses consumers pay at point of consumption). Adherents to objective 2 part ways with the pure-insurance school (those favoring objective 1) on the policy implications they derive from the putative high price-elasticity. Adherents to the pureinsurance school see in high price-elasticity the rationale for co-insurance and deductibles. Adherents to objective 2 typically reject cost-sharing on the part of patients, presumably because they deem the consumption of truly unnecessary health services to be a trivial problem and do not wish to see coinsurance deter consumers from using needed health services. Precisely what health services are "necessary" or "unnecessary" is, unfortunately, a question on which the experts invited to this Committee are unlikely to agree. In connection with the issue of coinsurance it may be observed that some opponents to cost-sharing appear to rest their case on mutually inconsistent assumptions. Thus, on the one hand they reject cost sharing on the ground that financial barriers (however small) may deter some consumers from seeking needed health care. On the other hand, they suggest that the demand for health services is typically quite insensitive to out-of-pocket expenses in the first place, and that cost-sharing can at best yield only marginal savings in health-care utilization. It is difficult to reconcile these assumptions, unless one is willing to accept the argument that those very few services the demand for which is pricesensitive also tend to be much "needed" services. Since the question of coinsurance is likely to come up time and again before this Committee, members may wish to inquire from opponents of cost-sharing on what set of assumptions they rest their case. OBJECTIVE 3 AND ITS UNDERLYING ASSUMPTION Those who would like to see the nation's health-insurance system evolve into an insurance-plus-redistributive scheme rather than a pure insurance scheme typically feel that merely granting the lower-income strata financial access to health services may not be sufficient if health-care provider facilities fail to locate in the areas where such families concentrate (e.g., urban centers or the rural hinterland). Thus one finds demands for a redistribution of purchasing power commonly accompanied by demands for a reorganization of the health-care delivery system. These demand sare based on the popular conception that our existing system is in a perennial state of crisis and certainly incapable of accommodating the additional demands likely to be placed upon it through the introduction of health insurance. While a mere expansion of the existing system along traditional lines might be an expedient solution, the shortcomings of the existing system are held to be sufficiently serious to rule out so simple a policy response. National health insurance is thus seen both as a source of potential problems on the delivery side and as a vehicle through which these problems can be solved. As noted earlier, the catalogue of commonly stated grievances about the existing American health system is long and varied. However, with some simplification the misgivings that have at one time or another been voiced in this respect can be distilled into the following summary: 1. It is held that the existing provider system, composed as it is of several hundred thousand more or less independent decision-makers ("firms"), is really a "nonsystem" that lacks effective planning and coordination. This lack of coordination is said to have resulted in: Widespread duplication of costly facilities, equipment, and patient record systems, and hence unnecessarily high costs of health care; a maldistribution of medical resources, with a relative abundance of facilities in affluent urban areas and a corresponding lack of facilities in the poorer urban or rural areas; and lack of comprehensiveness and continuity of care. 2. It is held that current legal restrictions on medical practice, and in particular current license laws covering both medical and paramedical manpower, tend to Discourage experimentation with the use of paramedical personnel (physician assistants, nurses, medical technicians) for tasks now requiring scarce and expensive physician time; and discourage entry of labor into the health-care sector since current licensure laws effectively rule out the prospect of upward mobility in the health-manpower hierarchy. While it is conceded that licensure laws do protect the consumer from unqualified personnel, it is felt that this benefit is not sufficient to offset their stifling effect on cost-reducing innovations in the organization of medical-care delivery. 3. It is suggested that the financial arrangements currently accompanying the delivery of health services, i.e., the emphasis on payment (fee or charge) perservice, combined with the fact that the consumers are typically more fully insured for inpatient than for outpatient care tends to: Deter consumers not covered by third-party payment from seeking relatively inexpensive preventive care in the early stages of a medical condition, thus necessitating more expensive therapeutic care later on; encourage consumers (and their physicians) to substitute costly (but insured) hospital services for less costly (but uninsured) ambulatory care; bar some consumers (the lower-middle class) from access to needed care altogether; and encourage providers to overprescribe or oversupply health sevices to those consumers who can afford to purchase medical care. 4. With respect to the hospital sector in particular, it is held that the prevalent full-cost reimbursement formula, combined with the fact that a hospital's prestige increases to some extent with the complexity of cases it can handle tends to encourage the acquisition of costly facilities and equipment that are not fully used. In addition, it is sometimes argued that the pervasive control by the medical profession over almost all facets of the health-care delivery process-e.g. the physician's voice in the management of hospitals-has tended to make the health system more responsive to the intellectual interests of the profession than to the medical needs of consumers. This allegation is sometimes accompanied by the argument that, by virtue of their training, physicians are ill-equipped to manage properly so complex a system as the United States health-care sector and that a restructured delivery system should provide for expanded lay control over the allocation of medical resources. It will have been noticed that the criticisms enumerated above tend to fall into two major categories: those concerned primarily with the quality of the health care received by the American people as a whole, and those concerned with the Efficiency (or costs) with which that care is being produced. In other words, almost all proposals for a restructuring of the American health-care delivery system seek to accomplish improvements along either or both of these dimensions. As an economist I feel poorly equipped to address myself to the problem of quality. The following remarks will therefore be confined to questions related to the economic efficiency of the health-care delivery system. In thinking about ways to reorganize the health-care delivery system it is convenient to divide that system somewhat arbitrarily into two distinct (though much related) components, namely: A. The technology of health-care production and delivery (by which is meant the organization of medical resources within health-care provider facilities, the distribution of available resources among facilities, and the geographic distribution of provider facilities); and B. The financial flows accompanying the delivery of health services from providers to consumers. Proposals for a reorganization of the technology of health-care production generally seek to bring about one or a combination of the following four changes: 1. The consolidation of small, independent provider facilities into larger units, with the aim of reaping potential economies of scale in health-care production. 2. The substitution of relatively more abundant and/or less costly productive factors for relatively scarcer and/or more costly inputs. 3. Increased division of labor and specialization of functions among some types of facilities (especially in the hospital sector) and the integration of specialized units into a coordinated, comprehensive, and efficient delivery system through either full-fledged regional planning or at least the more centralized control inherent in the HMO concept. 4. A significant redistribution of physician manpower among medical specialties (away from specialist services to primary care) and among geographic regions (away from the suburbs of metropolitan areas and toward low-income centers and rural areas). In some societies, such changes could be attempted simply through regulatory edicts. At one time or another, proposals to resort to direct regulation of healthcare providers have come forth in this country as well. Once again, in a statement of this sort there is not room for an extended discussion of the merits and demerits of direct regulation of the health-care sector. (See, however, the Institute of Medicine's Controls on Health Care, 1975.) One is, however, not encouraged by the long-run performance of direct regulation in other areas of the nation's economic activities. The impact of public regulation on the nation's transportation industry certainly should give policymakers pause. It seems more in keeping with the American temperament to influence the provider system through manipulation of the financial flows accompanying the delivery of health services. The financial flows accompanying the delivery of health services furnish an important nexus between a national health-insurance system and the nation's health-care delivery system. Since the insurance mechanism interposes a third party between the providers and the consumers of health services, that financial mechanism can clearly be so designed as to influence both parties-in particular, 57-677-75- -3 |