LMS President’s Message, December, 2019
President’s Message: Health Care Reform: How Did We Get Where We Are?
By Charles L. Papp, MD
This is my last newsletter and, fully aware of the risks, I would like to say a few things about health care reform. American health care has been debated, regulated, and legislated for decades. The topic is hotly debated amongst the presidential candidates, Congress, and President Trump. The discussions vary widely, and many hold strong opinions. Because of this, some of my comments may generate strong reactions, but before I am tarred and feathered, I need to give a disclaimer. Because this is a short article, it cannot address all the issues. These thoughts are my own and not necessarily the opinions held by the LMS or KMA. Many of you may have different insights. We all want cost-effective, accessible, quality health care. This article is not meant to push for a particular solution but to add to the discussion.
Many of us look to Europe’s health care, which is a centrally- managed, universal system, and compare it to our own. This leads to a dichotomous debate between government-run health care as opposed to private markets. Unfortunately, limiting the debate prevents a fuller understanding of the problems and limits useful solutions. Today’s problems have root causes that need to be considered in any debate. To have a better understanding of where we are now, it helps to look back and see how we got here.
Over 150 years ago, most care was provided at home. Hospitals were mostly charitable institutions for the poor and marginalized. Those who had the means could hire a physician to care for their sick loved one at home. Even President Garfield, when he was shot, was cared for in the White House for weeks and later at home until he died.
Over time, home care no longer could supply all the patient needs. As medical knowledge and surgical interventions increased, hospitals became burdened with increasing financial strains. They became more labor intensive, required more equipment, and needed to provide a wider array of services. Patients of all financial levels found themselves requiring hospital care despite rising costs.
To help with costs, the idea of hospital insurance was floated in the 1920s. The first plan was in Dallas, Texas, in 1929. 1500 schoolteachers paid $6 a year for up to 21 hospital days per year at Baylor University Hospital. The insurance not only protected the schoolteachers but also improved hospital cash flow. The idea quickly spread. Hospitals began banding together in groups, giving patients hospital choices. Using this model, Blue Cross was started in 1932.
From the beginning, the programs had at least three significant problems. First, unlike other insurances, these plans were not meant to cover unusual, unexpected, costly events. Instead, they were more like prepaid service policies. The plans covered all costs up to a limit, not just the costly, unexpected ones, thereby providing hospitals a steady demand and more predictable cash flows. Secondly, the plans only paid for inpatient costs, which created an incentive for in-hospital care and created a disincentive for outpatient care. Lastly, the benefits provided were service based not financially based. Patients received services without knowledge of the true costs. They did not have an incentive to seek cost-effective, efficient care and became indifferent to the actual cost and amount of medical services. This lack of cost transparency and competition created an environment where cost increases for medical care were easier and patients were eager to utilize the services. Because the hospitals offered care as groups, there
was very little to no price competition between them. Clearly, this system was popular with hospitals, as well as doctors, since the income stream was predictable, and patients were not involved in the cost of services.
Blue Cross plans spread rapidly to the point that they came to the attention of state insurance regulators. The states pushed to regulate them as they did other types of insurance. The push was to make them carry reserves to guarantee their promises and to tax them like other types of insurance companies. Blue Cross fought back, arguing that their hospitals and their ability to provide care were their reserves. They also argued that since hospitals provided a public service and often provided service to low-income individuals, they should be tax exempt. The state legislators agreed and passed enabling legislation that freed the plans from holding reserves and exempt from paying taxes. This allowed Blue Cross to dominate the market. Patients were further separated from true costs of medical services because the increased income from tax incentives was not directly reflected in premiums.
At first, physicians were averse to offering services through insurance. The success of Blue Cross, however, raised concerns that hospitals may start to offer payment plans for physician services without significant physician input. In addition, the Great Depression made it difficult for many patients to pay for medical services. As a result, physicians formed Blue Shield using AMA guidelines. It was modeled after Blue Cross and also was given enabling legislation. By 1940, half of all health insurance policies were held by Blue Cross and Blue Shield. To compete, private insurance had to mimic Blue Cross/Blue Shield and offer services based on a cost-plus basis. They found it profitable to insure groups of employees who tended to be young and healthy. Although Blue Cross/Blue Shield had the advantage of a tax-exempt status, they were required to use community rating. All patients in the community paid the same premium. Private
insurers could engage in experience rating, charging sicker patients’ higher premiums. In this way, private insurance plans prospered as well.
During World War II, labor in the United States was in short supply. The federal government had placed price and wage controls limiting the salaries employers could offer. To attract employees, businesses started offering health insurance. Federal law was enacted during this time, defining health insurance as part of wages, allowing trade unions to negotiate benefit packages on behalf of workers. In addition, employee-sponsored plans were made tax exempt. With this in place, enrollment grew from 20,662,000 in 1940 to nearly 144,332,000 in 1950. The total population of the United States was 152,000,000 in 1950.
By the end of the 1940s, the system seemed to be working, but because of its design, problems were inevitable. Since single hospitals were not allowed to form plans, hospitals offered insurance as groups and did not need to compete. Cost-plus billing without transparency took away incentives for efficiency or cost reduction. The tax-exempt status of employer-sponsored health plans encouraged employers and patients to put more money in health plans as opposed to wages. This increased money available for health care spending while the distance between the payer and the receiver of health care continued to get wider.
Employer-based health insurance had its own unique problems. Most insurances like auto or life use community and experience rating. They will look at the average cost of claims for a particular community as well as assign special risks to certain policy holders. A driver may pay a certain rate until he has a number of accidents. Following this, rates will be raised or the company may cancel the policy. With employer-based health care, this becomes a problem. Auto insurance is not higher because you live in a neighborhood with some bad drivers, but your health insurance may be significantly higher if you work in a small company with several employees who are high utilizers. This is why 65% of uninsured workers work for companies with fewer than 25 employees.
As health care costs rose, two populations became increasingly difficult to manage — the poor and the elderly. In response, the government started Medicaid and Medicare in the mid-1960s. Hospitals and physicians initially opposed Medicare and Medicaid as government intrusion until they realized how much these programs increased their incomes. The number of patients who could afford care significantly increased and medical professionals’ incomes doubled in the 1960s. Much of the early opposition was eliminated.
The increased money put into the health care system bought a great deal of power for the state and federal governments. State governments were becoming the major source of income for private hospitals. This opened the opportunity for political decisions to supersede medical ones. Large influential lobbies could now advocate health care decisions to benefit their particular constituency. They could influence the number and location of hospitals, increase or decrease coverage for certain groups, and adjust the method of distributing medical payments. As the government health care agencies increased in influence, it became increasingly difficult for a hospital or physician to opt out of Medicare or Medicaid. This did not seem to matter at first. Incomes were still booming well through the 1980s. However, the storm clouds were brewing.
During the 1980s, medical expenses increased 117%: 43% was due to inflation, 10% was due to population increase and aging, 23% was due to technological advances. The remaining 24% portion of health care inflation was unexplained. This gave the impression that costs were increasing without legitimate cause. By the 1990s, this kind of growth in spending could no longer be tolerated. Over the next 20 years, several ideas were proposed and enacted, including PPOs, HMOs, ACOs, RBSV payment systems, gatekeepers, capitation, and the Affordable Care Act. Several presidential candidates feel the current system cannot be fixed and are proposing changing to single-payer, government-run health care.
Despite all the changes, the root problems were not addressed. The consumer continues to remain widely separated from costs. Physicians continue to spend money, employee time, and resources trying to work through an ever-changing, murky, complicated system. The amount of money spent on health care bureaucracy unrelated to patient care has grown tremendously. Hospitals hire large departments of employees dedicated to maximizing billing, and insurance companies in opposition have their own army of employees dedicated to minimizing cash outflow. One study stated that an average hospital has more employees dedicated to billing issues than they have hospital beds. The New England Journal of Medicine published an article in 2003 stating that in 1999, health administration costs totaled $294 billion or $1059 per capita versus $307 per capita in Canada. This was 20 years ago. It is frightening to think what the amount is now. The amount of money changing hands in medicine that does not involve the actual care of patients is much too high.
As a member of a private practice, I would welcome a system that lets the consumer choose how health care dollars are spent. Giving patients a stake in health care spending would lower costs and encourage efficiency. In most cases, they are able to assess their medical needs and shop the cost and quality they want. We currently have a system preventing that. Currently, most proposed changes increase regulations, complexity, and bureaucracy. They do not give power to the consumer. They do not encourage competition or efficiency. I realize medicine can be unpredictable and outcomes can sometimes be uncertain, but there are many procedures, tests, screenings, vaccinations, medical devices, and pharmaceuticals that can be treated as commodities. As such, they could easily have transparent costs. At least basic, preventive, and routine care should be in the hands of the consumer. Certain special circumstances arise, such as unexpected costly medical illness, and pre-existing conditions would need special treatment. Special considerations need to be taken for the poor to have access to health care. Even in these situations, health care delivery could be improved by giving patients a stake in how the money is spent. There are ways to help those with pre-existing conditions and make health care universal without enclosing it in bureaucracy.
In addition, physicians and hospitals need freedom from burdensome regulations so that they can compete and innovate. Many quality measures prescribed by insurance companies as well as government agencies are not based on evidence and end up being wasteful and costly.
As colleagues, I know many of you have had the same frustrations and have strong feelings about the direction health care is going. I would like you to share them with us. We want to hear. Better yet, get involved with the LMS. The LMS is anxious to have involved physicians. We are made up of your colleagues and friends, and we are dedicated to improving the practice of medicine. Send me an email, come to a dinner meeting, or just stop by the office and let us know what you think. Keep in mind that creating change is slow and frustrating, but it can be very rewarding. Physicians need to be major players in shaping the system that shapes our practice and affects our patients.
Thank you for granting me the opportunity to be your president this year. It has truly been an honor and a joy.
Gratefully, Charles Papp, MD
Note: I would like to thank Lonnie Wright, Director of the Baptist Lexington Library, for the many literature searches he has undertaken this year. They have been invaluable. I want to thank Chris Hickey for his superb management of the Lexington Medical Society. He has been an essential asset to me as well as the society. Also, thanks to Cindy Madison at the Society, as well as Kathy Bethel and Shannon Bratton from my office who took the time to read through each newsletter and polish them in a way I never could. My last and biggest thanks is to my wife Karen who provided encouragement, grammatical expertise, and most importantly, loving patience.
Thomasson, M. (n.d.). Health Insurance in the United States. InEH.Net Encyclopedia. Retrieved from http://eh.net/encyclopedia/health-insurance-in-the-united-states/
Eilers, R. D. (1962). The Fundamental Nature of Blue Cross and Blue Shield. The Journal of Insurance, 29(3), 385–402. https://doi.org/10.2307/250401
Woolhandler, S., Campbell, T., & Himmelstein, D. U. (2003). Costs of Health Care Administration in the United States and Canada. New England Journal of Medicine, 349(8), 768–775. https://doi.org/10.1056/NEJMsa022033