Time to Revive Health-Care Reform?

by James Fallows

May 6 - May 20, 1996

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EXECUTIVE-DECISION MEMORANDUM

To: The President of the United States
From: D. N. Forser, Chief of Staff
Re: Your choices in Health Care
Date: May 6, 1996

I hope that you've been watching the evening news shows recently. No, not for the "new" reports themselves. We've all learned the hard way that we just get upset if we pay too much attention to whatever the correspondents are complaining about each day.

What I hope you notice are the commercials. Make a list of the products that are advertised on the network news programs each night. Geritol. Polident. New ulcer medicines and arthritis formulas. Remedies for fitful sleep. Grecian Formula. Even--brrrrrrr--Depends.

This list should be frightening to the news producers because it means that their viewership is getting older fast. Unfortunately it's not just the TV audience. America as a whole will soon be over the hill. (By the way, you've been looking terrific recently!) As a nation we're getting older and more disease-ridden, and we're spending more time and money on medical care. The ads on the TV shows illustrate both sides of the problem: more people are older, and there are more health-related aids for them to buy.

For each human being the cycle of health, sickness, and aging is a private drama. The nuisance is that it also turns out to be a public concern for you, as President. The problem, to put it simply, is that the people who elect you want to have more medical care available to them than they are willing to pay for. The healing power and the cost of medical technology continue to expand year by year. Every man who is losing his hair might want to have a $20,000 micro-regraft job. Many women might want to have periodic $15,000 face-lifts. In the old days people gave up active sports, travel, and sex as the years went on. Now, at a cost, medical intervention can provide the illusion that time is standing still. At a far more serious level, most Americans will eventually die from either heart disease or cancer. Aggressive treatments like coronary-bypass operations, at a quarter-million dollars or more apiece, and experimental cancer treatments with radiation and exotic drugs can give people extra years of life. Technical breakthroughs in neo-natal care have made it possible for two-pound infants to survive and sometimes thrive outside the womb. Similar breakthroughs in geriatrics mean that individuals over age eighty now constitute the fastest-growing population group in America.

Nearly all Americans favor these innovations--when they mean that they, their parents, children, or loved ones, have a chance for fuller, longer lives. (There is, of course, some controversy about keeping very old people alive beyond the point where they seem to be enjoying life, or trying to preserve extremely premature infants, who often pass their entire, brief lives in incubators in the intensive-care unit.) Nearly all Americans are alarmed by their ever-mounting bills for health insurance and the ever-larger bite taken by Medicare taxes. These reactions--hunger for medical breakthroughs, irritation at medical bills--are of course two halves of the same phenomenon. Each individual wants the very best care but worries what will happen if everyone else has it too.

What has happened so far is that we've paid more and more and more for medical care. During the Clinton administration's unfortunate attempt to institute health-care reform, everyone got used to the idea that medical care represented one seventh of the entire national economy. Now it is closer to one sixth. Within a decade, at current trends, it will be one fifth. Often it's a mistake just to project current trends into the future, but the rise of medical costs has been one of the great constants of the modern era. In the half-century since the Second World War the cost of medical care has consistently risen about 3 percent faster than the general inflation rate. (When overall inflation was 7 percent, in the 1970s, medical costs rose by 10 percent. When overall inflation fell to 1 percent in the early 1990s, medical inflation was 4 percent.) A generation ago Americans spent about as much on health care as they did on all levels of education. Now health care represents about twice as much of the national economy as education does. And since people are getting older faster than they used to, and medical science is coming up with expensive remedies more frequently, it is hard to see why the trend will change.

Which brings us to you. Every part of the nation you lead is asking for guidance. Patients feel they are being bled dry financially in order to survive physically. Doctors and nurses resent being put under increasing control by insurance companies and for-profit Health Maintenance Organizations (HMOs). Auto-company executives point out that they pay more for health insurance for their workers than for the steel that goes into cars. Big-thinking economists point out that America devotes twice as much of its economy to medical care as European nations or Japan, while its average life expectancy is the lowest of this group.

Some of this problem involves dilemmas you cannot solve. Every person will think one way about "high-cost, high-tech" medical care when looking at pay stubs--and think in an entirely different, "cost is no object" way when watching doctors labor, with the aid of elaborate technology, to save a son or daughter who has been struck by a car. But you can make some large choices of policy.

The big policy choices are outlined below. For your convenience, each carries a code-name linking the plan to a prominent supporter. Please advise us on which way to go:

Option A: Code Name "LYNDON," the single-payer plan. (Please read brief memo in support of "Code Name Lyndon")

Option B: Code Name "HILLARY," the managed-competition plan. (Please read brief memo in support of "Code Name Hillary")

Option C: Code Name "TEDDY," the insurance-reform plan. (Please read brief memo in support of "Code Name Teddy")

Option D: Code Name "RUSH," the market-forces plan. (Please read brief memo in support of "Code Name Rush")

Option E: A Bold New Approach To Cut-Cutting. [Mr./Ms. President, this seems to be an unauthorized option, inserted by the speechwriting staff.]
(Please read brief memo in support of Option E)

Option A: Code Name "LYNDON"
The Single-Payer Plan

By large margins, Americans say in polls that they dislike the idea of "socialized" medicine. By even larger margins, they express their satisfaction with Medicare--which is a government-run, "socialized" medical plan.

The more precise name for Medicare is a "single-payer" system. Patients get treatment from doctors, hospitals, and clinics of their own choice, but all the bills are submitted for reimbursement to the same source, the "single payer" of the plan. The single payer of the Medicare system is the federal government. It takes fees in from salary deductions, and it sends them out to cover recipients' bills.

A single-payer system is different from socialized medicine in that the government does not dream of providing the medical care itself. America has one true socialized medical system: the network of Veterans Administration hospitals and clinics, where veterans receive treatment from doctors and nurses who work directly for the U.S. government. (The military medical system, from which Congressmen and Presidents get their socialized care, works on the same principle.) A few other countries try direct, government-operated medical care. But virtually every other industrialized nation applies a single-payer system. The government manages one large payment pool that provides basic coverage for all citizens and sends out payments to all doctors, hospitals, and pharmacies.

As the father of Medicare, Lyndon Johnson knew that it would have one great advantage: it would bring coverage to all people (in this case, all older people), not just those who had money. This made for a more humane society, for obvious reasons. But it also proved to be highly efficient. When people without health insurance get sick, even though they cannot pay they do finally get treatment. But they get it in the least efficient way possible, in hospital emergency rooms. With the universal coverage provided by Medicare, older people got more preventive care. This in turn helped them lead healthier lives and held down acute-care costs.

Medicare had another great benefit, less obvious when the system was started: it was far simpler for doctors and hospitals to administer. The major bureaucratic problem for today's hospitals is not the hated U.S. government. It is the nightmarish web of private insurance companies. A government-run single-payer system is, surprisingly, a step against bureaucracy, since most of the complication comes from private plans.

It is time to extend Lyndon Johnson's vision to the rest of the country. All we have to do is keep our familiar Medicare system--but remove the provision that you have to be over age 65 to qualify. The system would be called Americare. The main points would be:

Everyone would be eligible for basic care, as with Medicare. Those who wanted their own insurance for extra coverage could buy it.
The same doctors, nurses, clinics, and hospitals that deliver care now would do so under Americare--but they would send their bills to the government.
Costs would be held down the same way they are under Medicare: with annual discussions and agreements about appropriate rates for different treatments and diseases. This is not perfect but is less annoying to doctors than the cost constraints imposed by private insurers.
You could tell the public that this is the successful "Canadian" plan. But don't bother. Just say that Medicare has worked--so well that we're letting everyone join in.

Option B: Code Name "HILLARY"
The Managed-Competition Plan

The single-payer approach (Code Name "LYNDON") might make a certain theoretical sense. But let us be practical, Mr./Ms. President. Americans are in no mood for a vast new government bureaucracy, requiring sweeping new payroll taxes to cover a service that the vast majority of Americans already provide for themselves.

There really are only two problems with today's health-care system. One is the lack of universal coverage. This may seem inhumane to some people. More important to you, it is a big practical problem--even for the insurance companies. As insurers have begun matching rates to people's ages and disease histories, in a weird way they have destroyed the market for insurance all together. Young people can buy cheap insurance--but many figure they don't really need it. Sick and old people either aren't allowed to get insurance (because of "preexisting conditions") or can't afford it because the cost is sky-high. Therefore they go without insurance--adding to the costs for everyone when they show up in the emergency room for care.

This is a problem the insurers call "adverse selection." They know full-well that the only answer to it is some plan of universal coverage. In effect this makes people share the cost of coverage through their whole lifetime--much as taxes spread the cost of schooling even for people without school-age children. No one thinks much of the Clinton plan these days, but when it was unveiled Mrs. Clinton seemed to have worked out a solution to the problem of adverse selection. It was through "employer mandates." This meant requiring employers to buy health coverage for everyone who had a job. This is a perfectly normal idea--even Richard Nixon was for it--and it builds on the fact that 90 percent of people who have coverage now have it through their work. Then the government would provide side coverage for those who had no jobs.

The other big problem of today's system is its out-of-control cost. The Clintons also had an answer for this, which channeled the power of market forces. The details are complicated, but in essence big medical organizations--HMOs, hospitals, doctors, plans--bid against each other for the right to provide service to large numbers of patients. The government itself uses this system quite successfully in providing coverage for its own employees. A dozen or so medical plans submit bids; each employee chooses which plan he or she wants to use.

The Clintons were right all along. They solved the two big problems--universal coverage, and uncontrolled costs--without a big new centralized bureaucracy, and without new payroll taxes. You can succeed where they failed.

Option C: Code Name "TEDDY"
The Insurance-Reform Plan

The era of Big Government is over. There is no better example than the change in Edward Kennedy's views. Twenty years ago he was the Congress's most forceful advocate of a universal, government-run, socialized medical system of a sort that even Bill and Hillary Clinton were afraid to advocate.

In 1996 Kennedy is a partner with Nancy Kassebaum, the Republican from Kansas, in sponsoring a moderate insurance-reform plan. The idea behind this bill is that Americans are not unhappy with medical care in general. They are upset only when a usually effective system has gaps or breaks down.

Most of these gaps involve changes in jobs. Nearly all Americans who have health insurance get it through their work. (See "Code Name HILLARY.") They are worried about losing it when they lose their jobs, or even when they voluntarily change occupations--as nearly all Americans eventually do.

The government should concentrate on patching up this "portability" problem and getting rid of other anomalies like the insurance companies' refusal to take on people with so-called preexisting conditions. Sooner or later everyone will have a preexisting condition, since we'll all eventually die of something. Support legislation that will ease the bumps in insurance coverage, requiring the companies to cover all applicants--perhaps even with the government subsidizing coverage for those with truly grave conditions. Otherwise, leave the system alone.

Option D: Code Name "RUSH"
The Market-Forces Plan

This country has made a specialty of talking itself into "crises." What's most wrong with our medical system is the frenzy we've worked ourselves into about it.

When people from the rest of the world are looking for the best medical care, do they flock into France or Japan or Canada? Of course not. They come to the United States. Our medical researchers dominate the world's scientific establishment. Our pharmaceutical companies have been part of a revolution that has raised the average life expectancy by more than a decade in this century.

Certainly there are problems with today's U.S. medical system. But they're no worse than the problems in bureaucratized, socialized systems in the rest of the world. And our system, unlike the others, has the tremendous resiliency of the market to allow perpetual corrections of the problems. Remember the big hubbub about medical cost inflation, which neared 10 percent in the early 1990s? The medical-inflation rate fell to a near-trivial 4 percent by 1995.

America's medical system is working fine as is. But the art of governing also includes knowing when to make the strategic gesture. You can tell the Congress that you are moving to 'solve' the medical problem (which is largely solving itself) by recommending an important market-enhancing measure. This is the 'medical savings account' concept that first got serious attention during the Clinton years. Americans already take it for granted that they must provide for their own retirement funds--but the government provides incentives for them to do so through IRAs, 401Ks, Keogh plans, and a thicket of other proposals allowing tax-sheltered savings for retirement. The same logic makes perfect sense when applied to medical expenses. Those government programs work best that encourage rather than require citizens to act in their own long-term interest. Tax-deferred medical savings accounts are the latest illustration of this principle.

American business has shown since the 1980s that it can bring about tremendous efficiencies, when its power to innovate, consolidate, and automate is freed from government regulation. The short-term disruptions, like many other in our history, are clearly outweighed by the long-term increases in productivity. There is no reason why the medical market will not respond to the same incentives. As we near a new millennium your duty as our president is to oppose those who would clog up this most-admirable part of our technological establishment.