Keynote Address

Dr. Uwe E. Reinhardt
James Madison Professor of Political Economy and Professor of Economics and Public Affairs at Princeton University

These tiers will develop because neither government nor businesses have found a way to tame health care costs. Over the past 35 years price controls, voluntary cost containment measures, and managed care have temporarily curbed spending, but none have had a lasting effort on trend. "The American health system expects to be fed 4.5 percent more purchasing power per capita each year, and if it isn't, it whines and kvetches. That's what happened during managed care. During the same period, GDP per capita grew about 1.55%, so the natural constant you tease out of this is 3 percent," says Reinhardt.

A brush with social equity
Managed care was an ingenious idea, says Reinhardt. The intent was that a responsible sponsor—either the government or an employer—would give employees vouchers they could use to buy a basic health insurance policy. In theory, the buyer could choose from among a handful of different insurance plans, each plan being a fully integrated health system. The main difference among plans is that a provider in plan A would not participate in plan B.

Under managed care, the system of independent doctors would fall by the wayside, and insurers would have the ability to terminate contracts with doctors who ordered expensive procedures that were not medically necessary or who charged high fees. Costs would ease.

Managed care had the potential to provide "social equity," says Reinhardt. "If the voucher was generous enough even the poorest people could afford a Kaiser-like plan . . . which I personally have the highest regard for."

And managed care worked—at least for a while. But as the labor market tightened, employees demanded wider access to care and felt they shouldn't have to pay for the additional flexibility. "In the end all these health plans flew apart and everyone was in everyone's network. The care managers actually morphed back to what they basically were—bill payers," Reinhardt explains.

On the supply side, the consolidation of the health system speeded the demise of managed care. A network was not viable without these behemoth systems that could dictate pricing. Consolidation and a tight labor market "put us back to where we were in the late '80s," laments Reinhardt, with premium increases around 18%.

"Managed care was not a failure. For a while it helped to constrain [premium] growth. We are better off for having had it. But as long as private insurance is part of the come-on in the labor market, cost control is strictly a recession tool. Once you have a tight labor markets, people will insist on Disneyland health policies and, desperate for workers, employers will give in."

This is a long-term problem. Despite the current recession, Reinhardt predicts that labor markets will tighten over the next 20 years as Americans age and move out of the workforce.

Working with a dubious forecast
Actuaries forecast that GDP will be $16 trillion in 2011, up from $10 trillion in 2001. Of the $16 trillion, health care will account for $2.8 trillion—double the expenditure in 2001. And while some may "feel like jumping off a bridge" when they hear these forecasts, this increase will nonetheless still not double the proportion of health care costs to total GDP. This is because the non-health care component is still expected to grow, albeit slower than the health care component.

The question becomes: Is this trend sustainable?

In 2011 health care is expected to account for 17% of total GDP, but by 2030 it is expected to jump to 28% and eventually soar to 40% by mid-century. As disturbing as these estimate are, they don't include the impact of aging baby boomers' increased needs for health care. Including this factor, the 3 percent growth rate differential between health care and non-health care segment could rise to 3.5 percent, and health care could account for 46% of total GDP by mid-century.

Over the next two decades, the nation can manage this trend at a macro level because non-health care GDP per capita will still be larger than it is now, but small business will suffer under the weight of heavy health care costs, if actuaries' long-term estimates prove accurate, Reinhardt explains. Beyond 2020, it's questionable whether it can be managed even at a macro level.

What are we buying?
Per capita Canada spends a little over half of the U.S. health care expenditure, and Canada "beats us on any health statistic—infant mortality, longevity, longevity of people at age 65 or at age 80," says Reinhardt. "So it's not clear what we're actually buying with the extra dollars we're spending."

In the Dartmouth Atlas of Health Care John Wennberg, M.D. and his associates at Dartmouth University point out that these types of differences can be found even closer to home. "After adjusting for age/sex biases and case mixes, taxpayers pay $9,000 in healthcare costs per elderly person in McAllen, Texas. Appleton, Wisconsin pays $3,400 for the same elderly person. San Diego: $5,600; and Baton Rouge: $7,700," Reinhardt continues. "The increased spending has no impact on quality of care or outcomes," adds Reinhardt. "That's worrisome."

What drives these costs?
On the demand side . . .

• Increasing wealth, a trend that many forget. On average, a 1 percent increase in GDP per capita triggers a 1.4 percent increase in health spending. This is true of other 'superior goods' like education where spending rises disproportionately to income. Plotting health spending per capita against GDP per capita shows that 84% of the international variation in health spending can be attributed to one variable: income per capita or ability to pay, Reinhardt points out.
• A paper-hungry country. A huge chunk of the $1,300 difference between expected and actual capital spending in 2000 can mostly likely be attributed to administration. America is moving toward mass customization where we write a different policy for every family, says Reinhardt—a trend that runs counter to the paperless systems of Germany, Canada, Finland and England.
• An unwillingness to ration health care. "Americans tend to think of the health system as a device that supplies additional life-years beyond what nature would grant them," says Reinhardt. "So the system gives a lot of life-years very cheaply in immunizations and annual checks. Then it gets more expensive. Canada, England—these countries absolutely ration care by some criteria that people accept. We don't like to do this. That's how we are." But Americans must be willing to accept the trade-offs, Reinhardt advises. "If you want to buy life-years at that high level of the supply curve then pay up, enjoy it, and quit whining about health care spending."

On the supply side . . .

• Labor shortage. The current 3.4 workers per elderly person will shrink to 2.2 in 2030 in the U.S. Immigration and an increase in net reproduction could help but, because everyone eventually ages, it's only a short-term fix, says Reinhardt. As wages for health care workers rise, more people will move into these fields, filling the gap that exists.
• New technology. Rapidly evolving technology has produced technologies including drug-coated stents and highly sensitive, automatic external de-fibrillators. "Wonderful stuff—but they're expensive, " points out Reinhardt. And again, Americans have an aversion to managing care—managing access—just because something is expensive.

The devil or the deep blue sea
Given this cost structure, employers have two choices: Large employers can confront employees with different insurance products but only agree to pay for a reasonable low cost product, pegging prices to the lowest common denominator or the reference price. If the employee chooses a more expensive plan, he or she would pick up the difference in cost. Reinhardt believes that most companies will shift to this approach.

The alternative? The much-talked-about, though to Reinhardt's thinking misnamed, consumer-driven health care. "Americans will hate this even more than managed care because they are not consumers," says Reinhardt. Medical fee schedules are too numerous and complex for consumers to track. "Does anyone know how to comparison shop for a doctor when there are 9,000 prices they would have to quote?" Reinhardt asks. "And even if you could find them on the Web, you don't know how many procedures that doctor is going to perform if you have a chest pain."

Employers could be shooting themselves in the foot in adopting consumer-driven health care. This is because employers would have to contribute to accounts for young, healthy employees—a cost that exceeds the amount employers now pay for this segment of the workforce. Yet other health costs would remain.

Small businesses have even fewer choices. As hospitals continue to serve as "catastrophic insurance companies for the uninsured," small insurers with no or little price clout will bear the brunt of these costs and be forced to pass them along to their insureds, which are typically small businesses. "If an employer buys insurance for a worker, it has to come out of total compensation," Reinhardt points out. "It ultimately comes out of take home pay." But with the demise of labor unions, workers "who sell only muscle have to compete with Mexicans, Guatemalans, Malaysians. Their wages are down. While the people who sell intellect, education or have financial capital—their incomes are up," Reinhardt adds.

And workers with family incomes no more than $30,000 cannot absorb $10,000 for health care insurance.

The Ugly American
Actuaries estimate that $100 billion are needed to cover the uninsured—a sum that was available not too long ago. In January 2001 the U.S. 10-year budget surplus was $3.1 trillion, excluding the $2.5 trillion for Social Security. By August 2001, that figure dwindled to $850 billion. Sixty percent of that drop was spent on a tax cut.

This decision reflects a moral trade-off, says Reinhardt, "Now if it's a choice of spending that money either on covering the uninsured and giving the elderly prescription drug coverage or granting the over-taxed, rich among us a well deserved tax cut, we'll take the tax cut if it's all the same to you."

"Of the 300,000 government-owned, military housing units, 200,000 are rated inadequate by the service's own minimal standards. Mr. Bush's $400 million increase for housing will help, but only a little. Congress would have to appropriate $20 billion to rebuild all the substandard units. If we can't even be good to our fighting mean and women, why would we be good to a waitress with children who doesn't have health insurance? I don't think we will."

Reinhardt continues, "We will never cover the poor because I think, in America, we don't like poor people. We look down on them because we think they didn't try hard enough." Having lived in Europe and Canada, Reinhardt believes that there "poverty is still substantially viewed as bad luck, that somehow you didn't get the breaks. In America, we tend to think of poverty as an occupational choice. We are a powerful country; we're a great country in many ways; we are a beautiful country, but we're not a good country, and that saddens me."