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Reforming America’s Ailing Health-Care System

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Reforming America’s Ailing Health-Care System

Market Lessons from a Social-Welfare System

May 18, 2010 By Peter Lawyer , and Jon Kaplan

Now that legislation enacting health care reform has passed in the United States, Republicans are licking their wounds as the Obama administration and the Democratic-controlled Congress expand their reach into the U.S. economy. True, the Patient Protection and Affordable Care Act is a leviathan whose consequences, both intended and unintended, are not easily foretold. As befits legislation of such magnitude, however, the reform plan offers something for everyone. The law itself is clustered around the bedrock issues of access, cost, and quality. It is in the third area, quality, where reformers from both sides of the aisle have a rare opportunity to borrow a market-based concept from a most unlikely place: Sweden.

Access was the marquee issue for reform, and it represents the seminal achievement of the law. By 2019, according to the nonpartisan Congressional Budget Office (CBO), health care reform will provide coverage to 32 million who would otherwise not have it—although some 23 million will still remain uninsured. The mechanism for expanded access is twofold. First, the law will fix the tattered safety net by greatly expanding and harmonizing states’ Medicaid coverage—the program for low-income Americans whose cost is shared by the state and federal governments. Second, it will offer a sliding scale of subsidies to the 61 percent of Americans who earn less than 400 percent of the federal poverty guidelines (currently $88,000 for a family of four).

But this solution was not achieved without a still-simmering controversy. Supporters revel in their success in fixing a huge chunk of the problem facing the uninsured. Critics, meanwhile, howl that the fix fails to solve the underlying problem, costs a fortune, and tramples the constitutional rights of individuals who choose not to spend their own money on health insurance.

As always, cost is a lightning rod and, in this instance, the sticker shock is severe. According to the CBO, the government mandate will cost an estimated $794 billion through 2019. CBO argues that the legislation will reduce the cumulative budget deficit by $143 billion in this period. But if history teaches anything, it is that government cost estimates should be taken with an ocean of salt. In 1965, the original estimate for Medicare Part A, which covers hospitalization, projected a cost of $9 billion for 1990. Yet some 25 years later, the actual cost of Medicare Part A was $66 billion. Including the expansion of Medicare Part D in 2006, the cost of the health care program for elderly in the United States now tips the scales at $447 billion—and is rising.

The 2010 reform law relies on a combination of taxes and reduced payments to providers in order to finance the promised new benefits and subsidies. Physicians and hospitals will see Medicare reimbursements reduced by $157 billion via a recalculation of the “market basket” that determines payment rates. According to the Joint Committee on Taxation, health insurers, pharmaceutical companies, and medical device companies will pay some $60 billion, $27 billion, and $20 billion, respectively, in new taxes through 2019.

Industry participants, however they may grumble, will see their new costs mitigated by the huge influx of newly insured individuals. To be sure, there will be winners as well as losers. Already, the various stakeholders in the health care system—from pharmaceutical companies to hospitals and insurers—are plotting their strategies to compete under the new rules of the game.

Those outside the industry don’t get off so easily. Legislators wisely feared a stampede for the door if they allowed employers to make their employees wards of the state, so they blocked the exits by imposing penalties on large companies that drop health care coverage. They also reduced tax deductions for various health expenses as they expanded benefits payable to retirees, making it necessary for a number of companies to take special charges recognizing the future costs of the new legislation.

Within two weeks of the law’s enactment, 22 publicly traded companies announced one-time charges totaling more than $3 billion. AT&T and Verizon were at the top of the lists for the first quarter of 2010, posting one-time charges of nearly $1 billion each. But the real knockout punch lands on wealthy individual taxpayers, who will shoulder $210 billion of the burden, as capital gains and dividend taxes, marginal income-tax rates, and the payment cap for Medicare Part A are revised upward.

With all the attention on access and cost, the third core element of the reform plan—quality—has slipped by mostly unnoticed. The law calls for Kathleen Sebelius, Secretary of Health and Human Services, to deliver a national strategy for improving the quality of health care no later than January 1, 2011—and offers up annual funding of $75 million through 2014 to define quality metrics, outcomes measures, and comparative effectiveness techniques, among other things. Secretary Sebelius and her aides will no doubt rely heavily on a set of 100 national priorities identified last spring by a broad group of stakeholders impaneled by the Institute of Medicine (part of the National Academy of Sciences).

The sections of the law that address quality are vague, but their potential impact is enormous. That’s a frightening prospect for conservatives concerned about government bureaucrats deciding who will get what kinds of treatments. Yes, the temptation to overreach will be strong. However, even the most ardent Tea Party activist would have to agree that transparent and reliable information on health care products, procedures, providers, costs, and outcomes would promote their ultimate goal: better health care within a fully functioning market.

In fact, this is where the United States can learn the most from Sweden, which has created extensive “disease registries” that enable medical professionals to evaluate care from a host of vantage points. The purpose is not to second-guess doctors, or to provide inputs to bureaucratic decision makers. Rather, the goal is to provide families, patients, doctors, suppliers, medical researchers, and administrators with an ongoing comprehensive look at what works, what works best over time, what shows promise, and what the costs are. This would be a vast improvement over the typical collage that U.S. payers and providers in health care cobble together and work with today, using incomplete data from office visits, hospital records, and insurance payments. 

Sweden’s 69 disease registries include patient-level information on treatments, outcomes, and costs on a range of disease states and treatments: heart disease and stroke; cataract, gallstone, and vascular surgery; rectal cancer; pain management; rheumatoid arthritis; and intensive care. Twenty-two of the registries track 85 percent of all patients diagnosed and treated in Sweden.

The resulting database provides an in-depth look at where Sweden directs 25 percent of its expenditures on health care. It also serves as a basis for doctors, hospitals, and other providers, payers, suppliers, and patients and their families to assess both the cost and quality of care. It also provides a wealth of information to clinical researchers seeking new treatments and cures. Swedish providers, suppliers, health authorities, and academics are now exploring ways to expand the registry system to cover 57 percent of the country’s tab for health care—an investment of $4 billion that will generate an estimated payback of $44 billion over ten years.

Could the United States, with its commitment to free-market principles, adapt a “value-based” approach to health care like the one championed by Sweden, a country at the forefront of experiments in social welfare?

It would be an odd twist to be sure. But if the result is better, readily available information that helps doctors and hospitals reduce pain and suffering, minimize errors, and offer patients the best treatment options, then U.S. market fundamentalists could do worse than to emulate their Swedish peers in social welfare.

Reforming America’s Ailing Health-Care System
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