Rationing Health Care Is Not Necessary

Rationing has long been a dirty word in the health care reform debate. HMOs hotly deny that they are engaged in rationing. Politicians decry rationing, whether it is inflicted directly by HMOs or indirectly by lack of insurance. Polls consistently indicate that a large majority of Americans oppose rationing as a means to reduce health care spending.

The call for rationing first became audible in the late 1980s as health care inflation worsened. It got louder in the early 1990s as universal health insurance rose to the top of the nation's agenda. It has grown louder still over the last five years as it has dawned on pundits that HMOs are incapable of reining in health care inflation. Here are some examples of statements advocating medical rationing:

• “Eliminating inefficiencies in the system can provide brief fiscal relief, but rationing of beneficial services, even to the well-insured, offers the only prospect for sustained reduction in the growth of health care spending” (Henry Aaron, a prominent economist with Brookings Institute, in a 1990 article for Science)
• “Successful cost control will require rationing of services to the very ill” (Aaron, again in a 1992 article for Health Affairs)
• “A country can provide unlimited care to a portion of the population or limited care to everyone. But it can't provide everyone with unlimited care, because the demand for health services knows no end” (Jane Bryant Quinn in a 1993 column in the St. Paul Pioneer Press)
• “[P]olitical leaders must tell the public the truth...: We can't afford unlimited health care. Rationed care is inevitable” (Stephen L. Cohen, a syndicated columnist in a 1999 column for USA Today)
• “The question is...not if we ration—but how” (David Broder in a 1999 column for the Washington Post)
• “No one dares discuss rationing, the most toxic but inevitable of all subjects,” (investment banker and government-waste guru Peter G. Peterson in a 2000 op-ed for the New York Times)
  • Why It's Time for Health Care Rationing (a book published by MIT Press in 2000)

  To give you some idea of how painful a deliberate debate about rationing will be, consider this exercise developed by American Health Decisions (AHD), a nonprofit that, according to its web site, “helps people understand health care choices.” AHD conducted focus group sessions in which subjects were asked to state how they would spend $360,000 on the following 6 categories of patients, each of which would cost $120,000 to treat: 4 second-stage cancer patients, 2 heart patients, 2 elderly hip-replacement patients, 1 elderly kidney patient, 1 schizophrenic child, and 4 adults blinded accidentally. (Oddly, the cancer and heart patients were described as “with children.”)

  You see the problem: These six categories of patients would cost $720,000 to treat, but in this cruel, pretend world you've been asked to play in, you only have $360,000 to spend. Who gets thrown off the island? And by what rationale? Can we cross the three elderly patients (the hip-replacement and kidney patients) off our list and put the schizophrenic child on the must-save list on the basis of age? If you're into pitting kids against the elderly, why not add the cancer and heart patients to the must-save list because they have kids to raise, whereas the four blind adults don't have kids and the elderly patients, if they had kids, have already raised their kids? This implies that you think elderly people are dispensable.

  If those choices are not painful and baffling enough for you, consider this choice actually posed to the citizens of Oregon in the late 1980s: Should Oregon's Medicaid program pay for 34 organ transplants for poor people or should it pay for prenatal care and delivery services for 1,500 poor pregnant women? This was how the choice was initially framed for Oregonians in 1987 after Colby Howard, a seven-year-old Oregon boy, contracted leukemia a few months after the Oregon legislature discontinued Medicaid coverage for organ transplants. Had Colby been diagnosed a few months earlier, Oregon's Medicaid program would have paid for the bone marrow transplant that might have saved his life. Colby's mother had managed to raise $80,000 of the $100,000 deposit required by the hospital when Colby died. In the furor that followed Colby's highly publicized death, rationing advocates argued that saving Colby would have meant short-changing other poor people.

  But are the rationing advocates correct? Is it true that the only way to insure all Americans is to ration “beneficial services,” as Aaron put it? No, it is not. Those who call for rationing now are wrong and unethical. It is unethical for “experts” and “ethicists” to call for medical rationing before we have had a debate about the wastefulness of the U.S. health care system. It is unethical to tell the public that our only choice is one that pits Colby Howard's bone marrow transplant against the medical needs of 1,500 pregnant women, when in fact we could debate many other choices, such as Colby's transplant versus a tiny sliver of the U.S. drug industry's obscene profits (those profits are four times those of the Fortune 500). Or we could debate prenatal services for 1,500 women versus paying the annual salary of one or two HMO lobbyists. Or we could debate treating the two heart patients presented in the AHD exercise versus a half-dozen HMO advertisements.

  Rationing, defined to mean the denial of medical services that benefit patients, is rational and ethical only under circumstances in which resources are clearly limited. For example, it makes sense for medics on a battlefield to engage in triage, that is, to treat first those soldiers who are alive but seriously wounded because they stand to benefit more from treatment than those soldiers who are dying or are less seriously wounded. Here's another example: Because only 5,000 livers become available in America each year while 7,000 Americans suffer liver-failure annually, it makes sense for doctors to give liver transplants to the 5,000 patients who will benefit the most.

  But it is ludicrous to claim that resources are scarce in the U.S. health care system. The U.S. system, which gobbled up $1.2 trillion in 1999, is grossly inefficient. Experts on both the left and the right share this assessment. Here is an excerpt from a 1989 article in the New England Journal of Medicine by Alain Enthoven, a conservative Stanford economist and one of the nation's best-known proponents of a market solution to the health care crisis: “The present system is wasteful in many respects.... Much care appears to be of unproved value. There is considerable duplication and excess capacity in our medical facilities.... We have a system which is neither efficient nor fair.” Here is a comment taken from the front cover of the July 1992 Consumer Reports, a magazine that has endorsed a single-payer system: “This year we will throw away at least $200-billion [almost a fourth of total U.S. spending in 1992] on overpriced, useless, even harmful treatments, and on a bloated bureaucracy.”

  By my calculations, the U.S. health care system may be wasting up to $300 to $400 billion dollars a year. To put this in context, it would cost about $30 billion to cover the nation's 43 million uninsured with typical insurance, and perhaps $40 billion to cover the uninsured with insurance that has no deductibles or co-payments.

  The waste in the U.S. system may be sorted into five categories: (1) unnecessary services, (2) excessive administrative spending, (3) excess capacity, (4) excessive prices, and (5) fraud. Research on the last three categories is sparse and much of the research on the first two categories (unnecessary services and excessive overhead) was done in the early 1990s when the nation was engaged in a debate about which health care reform proposals would best address the inefficiency of the nation's health care system. Needless to say, these shortcomings in the research mean that a precise estimate of the wasted expenditures is impossible to derive.

  But you don't need a precise estimate of the total waste in order to accept the argument that it is unethical to ask Americans to debate rationing before we've debated whether the waste in the system is acceptable. You need only know that the evidence in support of the assertion that the U.S. system is wasteful is compelling. A conservative estimate of the cost of excessive administration spending and excessive prices alone comes to 15 percent of total health spending.

  Excessive administrative spending refers both to the administrative spending of insurers and medical providers (doctors, hospitals, etc.). Twenty-five percent of the one trillion dollars we spend on health care each year is spent on administering the system. No one claims that it is possible or desirable to reduce administrative spending to zero. The issue is whether we could spend less than a fourth of our health care dollar on clerks, HMO doctor police, ad writers, lobbyists, merger specialists, and a host of other functionaries who do not provide health care to patients. The evidence suggests that we could cut the share of our health care dollar going to administration down to 10 to 15 percent. In other words, we're wasting $100 to $150 billion annually in administrative costs alone.

  Several studies indicate that administrative spending grew rapidly as managed care spread. Because HMOs hire people to supervise doctors and hospitals, and because doctors and hospitals hire people to deal with HMOs, this should surprise no one. In a 1996 article in the American Journal of Public Health, David Himmelstein and two Harvard colleagues demonstrated that employment of all administrative personnel (that is, administrators in both the insurance and the provider sector) grew by 288 percent between 1968 and 1993 while the number of physicians grew by just 77 percent. A 1996 paper published in Health Affairs reported that between 1980 and 1993 hospitals increased their administrative staff by 47 percent (while cutting their nursing staffs by 7 percent). In Minnesota, a state that, along with California, deserves the title of “the cradle of managed care,” HMO administrative expenditures rose 403 percent between 1980 and 1991 (the years in which HMOs took over Minnesota's system) while HMO expenditures on medical services rose 255 percent.

  Studies that attempt to measure excessive administrative spending by insurers (as opposed to providers) typically compare private-sector U.S. insurers to Medicare or to the national systems of other countries, notably, Canada. Medicare's overhead is 2 to 3 percent while the overhead of private-sector insurance companies ranges from 15 to 30 percent. If you give Medicare a dollar in taxes, Medicare will keep 2 or 3 cents to pay the salaries of its staff, its utility bills etc., and will pay out 97 to 98 cents to doctors. But if you give a dollar in premiums to an insurance company, it will keep 15 to 30 cents for overhead and pay out 70 to 85 cents for medical services. The overhead costs of Canada's “single payer” system are about 1 percent—even lower than Medicare's (probably because Congress requires Medicare to contract with private insurers to process Medicare claims).

  It is not hard to see why Medicare and Canadian health care administrative expenditures are so low. Unlike Aetna or Blue Cross Blue Shield, Medicare and Canada pay little or nothing for marketing, quarreling with doctors about how they should practice medicine, underwriting (which means doing research on a patient's health history and setting premiums accordingly), wining and dining state and federal legislators, paying high salaries to executives, and paying dividends to stockholders.

  Now let's switch the subject from insurer overhead to provider overhead. The studies that have attempted to measure excess administrative spending by providers have compared U.S. physicians and hospitals to Canadian physicians and hospitals. In 1991, when single-payer legislation was still on the Congressional agenda, the General Accounting Office published a report on the administrative savings the U.S. could enjoy if its administrative costs (for both insurers and providers) were as low as those of Ontario, Canada's largest province. The GAO found that U.S. providers would enjoy administrative savings equal to 4.5 percent of total health care spending, primarily because billing for physicians is so much easier when they have to bill just one insurer rather than dozens or hundreds, each with different forms and different hoops to jump through.

  So if we could reduce insurer overhead to the levels of Medicare or the Canadian system, and if we could reduce provider overhead to the levels of the Canadian system, how much could we save? In the same study in which it analyzed the differences between U.S. and Canadian provider overhead, the GAO also reported that total savings on administrative costs at the insurer level would equal 4.5 percent of total spending. In other words, the GAO concluded that total savings to the U.S. in administrative savings alone from switching to a single-payer system like Canada's would be 9 percent, or, in current expenditures, about a billion dollars. The GAO concluded, “If the…single-payer features of the Canadian system were applied in the United States, the savings in administrative costs alone would be more than enough to finance insurance coverage for the millions of Americans who are currently uninsured. There would be enough left over to permit a reduction, or possibly even the elimination, of co-payments and deductibles [for the insured and uninsured], if that were deemed appropriate.” The GAO conclusions would be just as valid for an American-style single-payer run by Medicare.

  Other studies have reported that the administrative savings (for insurer and provider overhead combined) achievable by an American single-payer system may be higher than the 9 percent derived by the GAO, possibly as high as 15 percent.

  Therefore, Americans should ignore pleas from “ethicists” to debate health care rationing until such time as we have debated whether we want our health care dollars being used to pay for Blue Cross Blue Shield advertisements and HMO doctor police rather than, say, bone marrow transplants for poor kids with leukemia or hip replacement operations for elderly people with fractured hips.                      Z