Neither Public Nor Private: A Health-Care System Muddling Through

America's hybrid health care system is inefficient, but it's the best we've got.

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The United States is unique among developed nations in the extent to which it has resisted a government-run health care system. Nevertheless, it has often been said that the United States has the most heavily regulated health care system in the world. What does this mean?

In fact, our health care delivery and finance systems are mixed public and private. Health care professionals practice independently or in groups, while hospitals and other health care facilities are privately owned (although most are at least nominally "non-profit"). About thirty percent of Americans are publicly insured--primarily through Medicare and Medicaid--but public programs are often administered by private insurers. Sixteen percent of Americans are uninsured, but most of the rest are insured through employment-sponsored insurance, heavily subsidized through tax expenditures to the tune of roughly $200 billion a year.

Both our delivery and financing systems are heavily regulated. Moreover, not only are our delivery and financing systems a public-private mix, so is our regulatory system. Hospitals are regulated primarily by The Joint Commission, a private entity founded by and still dominated by physician organizations. Hospitals and physicians must comply with the utilization and payment rules of many different private insurers.

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Health care regulatory programs are imposed for many reasons, but four reasons stand out. First, many programs are justified as necessary to address well-understood market failures. The minimum coverage requirement (individual mandate) in the Affordable Care Act (ACA), for example, was enacted to discourage "adverse selection"--the tendency of only unhealthy people to buy health insurance if insurers must accept all applicants. Pharmaceuticals are regulated because few consumers have the information or ability to assess their safety or effectiveness. Second, we regulate because we are using private delivery and financing systems to accomplish public goals. Because the ACA relies on private insurers to cover uninsurable individuals, it prohibits health status-based underwriting. Federal law requires private hospitals to provide emergency care regardless of the ability of patients to pay, because Congress has been unwilling to provide a tax-funded public program to pay for it. Third, regulatory programs exist because we are paying for privately provided care and insurance using public funds, and must ensure that public funds are properly spent. Finally, much of health care regulation is best understood as special interest protection. Restrictive "scope-of-practice" laws, enacted by legislatures at the behest of special interest trade groups, protect the professional privilege of doctors and specialists while restricting public access to less expensive providers, like nurse practitioners and midwives.

Our problems are exacerbated because, as the Bipartisan Policy Center's Julie Barnes pointed out in a March 2012 "America the Fixable" essay, we pay for most health care on a fee-for-service basis. This creates incentives for physicians to provide as many discrete services as possible to maximize payment (a tendency often justified by an asserted fear of malpractice litigation). Moreover, hospitals, laboratories, imaging facilities, and drug companies are often eager to reward physicians for ordering their products and services. Attempts by the fee-for-service Medicare program to control the amount or payments physicians receive to a "sustainable growth rate" were stymied as utilization of services grew rapidly and intensive lobbying defeated attempts to reduce prices accordingly.

To combat these incentives, the federal and state governments have adopted a host of very complicated and often redundant statutes prohibiting kickbacks, self-referrals, and fraudulent and abusive claims practices, while private insurers impose pre-service approval and post-service utilization review for some procedures.

Not surprisingly, we have a dysfunctional health care system. We spend far more per capita and as a percentage of our GDP than any other country in the world. Despite this, 50 million Americans lack any certain means of paying for their health care, resulting in thousands of premature deaths and bankruptcies every year. Finally, the quality of American health care is not exceptional--we do very well with some things, like detecting and treating some kinds of cancer, but lag behind other countries in other respects and have a poor record for patient safety and medical errors.

What should be done? A purely private system of health care financing would solve some problems, but cause others. It would make all but the most basic health care inaccessible to many, perhaps most, Americans--a result most Americans would find unacceptable. Alternatively, we could move more toward a publicly financed system, the approach taken by all other developed nations. This solution brings its own well-documented problems, which vary from country to country--but it does allow much greater control over cost and facilitates broader access. The public solution runs contrary to the political culture of the United States, however, and is adamantly opposed by powerful interest and ideological advocacy groups. For the present, our mixed system must muddle along.

We can take steps, however, to reduce the regulatory burden. Most importantly, we can move away from fee-for-service payment. The ACA creates a Center for Medicare and Medicaid Innovation to experiment with alternatives such as bundled payments, and some projects are already underway. The ACA's Accountable Care Organization initiative encourages the sharing of savings among health care institutions and professionals, and represents the first time that multiple federal agencies, including the IRS, Federal Trade Commission, Department of Justice, HHS Office of Inspector General, and Centers for Medicare and Medicaid Services have worked together to create a pathway through the regulatory thicket.

Private insurers are also encouraging better integration and coordination of care. The Kaiser-Permanente system has for decades efficiently provided high-quality care, integrating health care financing and delivery. Integration of delivery and financing eliminates an entire system of regulation, while integration of professionals and institutions, with payment for both on a basis other than fee-for-service eliminates the need for another layer of regulation.

We cannot wholly eliminate the need for health care regulation. Feasible changes in the way we deliver and finance health care could substantially reduce the regulatory burden. In particular, we need to reduce friction at the public-private interface, which can be accomplished in part by moving away from fee-for-service payment. Although the ACA imposes additional regulations on our financing system, it also contains within it initiatives that could in the end significantly reduce regulation. We need to keep making progress along these paths.