JACK K. SHELTON AND JUUA MANN JANOSI
UNHEALTHY HEALTH CARE COSTS
Key Words: access, cost containment, health care system reform I. INTRODUCTION
Business is concerned about this nation's rapidly escalating health care costs and the impact these expenditures have on the access to and quality of health care. Businesses have struggled to control heakh care costs while attaining high quality health care for their employees. Many businesses have implemented cost control measures to reduce the rates of increase. However, despite high expectations, cost containment measures have not been successful in limiting health care cost increases. While some companies have reported success, their achievement is short term since high rates of increase return within a few years. In addition, though some companies experience short term rate reductions, the costs of the total health system have not been reduced. The temporary relief offered by cost containment measures has compelled many business leaders to discuss health care affordability and, in an attempt to have a long term impact on health care spending, to advocate reforming the national health care system. Suggested reform measures include a national health care Jack K. Shelton, Manager, Employee Insurance Department, Ford Motor Company, The American Road, Room 828, Dearborn, Michigan 48121-1899, U.SJ\. Julia Mann Janosi, Senior Health Policy Analyst, Employee Insurance Department, Ford Motor Company, The American Road, Room 828, Dearborn, Michigan 48121-1899, U.S.A. The Journal of Medicine and Philosophy 17:7-19,1992. 01992 Kluvxr Academic Publishers. Printed in the Netherlands.
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ABSTRACT. The private sector has implemented many cost containment measures in efforts to control rising health care costs. However, these measures have not controlled costs in the long run, and can be expected not to succeed as long as business cannot control factors within the health care system which affect costs. Controlling private sector health care costs requires constraints on cost shifting which necessitates a unified financing system with expenditure limits. A unified financing system will involve a partnership between the public and private sectors.
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Jack K. Shelton and Julia Mann Janosi
II. FORD MOTOR COMPANY AND HEALTH CARE COSTS The escalating costs of the U.S. health care system pose serious problems for both business and the country. The United States has the most expensive health care system in the world. Costs have increased, on average, at double-digit rates over the past 20 years, with similar levels of increase projected for the future. In addition, the United States has the only health care system in the industrialized world where the private sector, not the government, voluntarily finances the majority of health benefits for workers, retirees, and their dependents. 1 The problem of uncontrollable health care costs is an important issue at Ford Motor Company because health care is one of Ford's largest costs of doing business. Blue Cross and Blue Shield is Ford's largest health care supplier and the second largest supplier to Ford overall. In 1990, company health care costs were about $400 per vehicle and, when the health care costs of Ford's suppliers are included, health care costs are estimated to be about
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budget to put a brake on the present rate of cost increases. Though expenditure limits may seem radical, other attempts at cost containment have not worked and can be expected not to succeed in the future. Expenditure limits may be the last hope to control costs and provide access to care for the uninsured. Controlling costs and implementing a national health care budget will require government involvement. As the largest purchaser of health care, the government can unilaterally make changes that frustrate private sector cost control efforts. In the past, the government has shifted costs to the private sector by cutting back on Medicare benefits, underpaying Medicaid providers, and implementing DRG reimbursement rates. These cost containment measures by the federal government have not reduced the costs of the health care system, but instead resulted in cost shifting from public programs to private payers. In fact, cost shifting can constitute up to 25% or more of a privately insured patient's costs. Further shifting can be expected to occur when the government implements relative value scale (RVS) reimbursement rates. The private sector cannot contain its health care costs if cost shifting from the public sector continues to frustrate its efforts. The private and public sectors must work together if cost containment is to be successful in both sectors.
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III. ACCESS TO CARE
Despite high expenditures for health care, the United States is one of the few health systems in the industrialized world where a significant portion of the population (15% to 18% of the U.S. population under age 65) is without health insurance coverage. All other industrialized countries (except for South Africa) are able to provide universal access to care for their people and have lower per capita health care spending than the United States. These countries employ national cost containment controls and regulatory measures, including expenditure limits, to contain their costs. In the United States, the increase in the number of uninsured
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$675 per vehicle. In comparison, Ford estimates its Japanese import competition has health care costs of less than half this amount. Ford's experience with increasing health care costs has been similar to the national trend. Between 1970 and 1990 Ford's health care expenditures increased, on average, 11.2% annually; total U.S. health care expenditures for the same period increased, on average, 11.5% annually. Ford's health care costs for U.S. automative operations were $1.2 billion in 1990 or about 18% of payroll compared with a 6% level in 1970. Ford is projecting its health care costs, under business as usual conditions, will reach $2 billion by 1996 - doubling 1988 costs. This projection is without consideration of the impact on the corporate balance sheet of the Financial Accounting Standards Board (FASB) requirement for retiree health care accounting which will substantially increase Ford's booked costs.2 The problem of rising health care costs is not unique to Ford or auto companies; the double-digit rates of increase in health care costs affect all industries. According to the Health Care Financing Administration, spending for health services in 1989 was over 56% of before-tax corporate operating profits and 100.5% of after tax profits (K.R. Levit and C.A. Cowan, 1990, p. 133). The present slowdown in the economy and decline in corporate operating profits can be expected to exacerbate the health care cost and access problems. When the FASB requirement becomes effective, accounted health care costs may well exceed operating profits for many companies.
COSTS AS PERCENT OF GNP UNINSURED
40
MILLIONS
1977 1978 1979 1980
1981 1982 1983 1984 1985 1986 1987 1988
0 UBBBB-JMML—•BBB-JBBBfc-JHBBL-MBBLJHHBB_-BIMBB_J^H^l»»MMM-JMMLJBBHBJ 0
12.0
PERCENT
HEALTH CARE COSTS AND THE UNINSURED 1977 - 1988
UNITED STATES
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IV. NATIONAL PRIORITIES As the nation's health care spending continues to increase and consume greater amounts of the country's GNP, it affects the allocation of resources to other national priorities such as education, research and development, and the rebuilding of the nation's crumbling infrastructure. These are important needs for the nation's future and areas that directly affect the ability of U.S. business to compete in global markets. From 1970 to 1989, health care costs grew from 7.4% to 11.5% of GNP. As illustrated in Figure 2, on a cumulative percentage basis relative to GNP, that is an increase of 56%. At the same time (on a cumulative percentage basis of GNP), education decreased 8.5% and basic science research and development stayed relatively flat, growing only 2.6%. However, national debt, on a cumulative percentage basis relative to GNP, grew 47% (nearly as rapidly as health care costs) and, in 1989, national debt reached 55% of the annual GNP. Our country's allocation of resources reflects our national
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people closely parallels the increase in health care costs as a percentage of GNP (as illustrated in Figure 1). As the cost of providing health benefits increases, many employers have reduced or eliminated the coverage they provide for their employees, contributing to the growth in the number of uninsured people. Eliminating health coverage may be a last resorf cost containment measure for many companies (especially small businesses) that are forced to eliminate employees' health care coverage in order to stay in business. Government programs also are affected by the rising cost of providing health care. The federal government is caught between responding to the needs of the uninsured population while being constrained by the federal deficit and the national budget. Even without implementing universal access to care, the Medicare and Medicaid programs accounted for 10% of the federal budget in 1988. It may be expected that the government will not address the problem of access to care if, in doing so, such programs would increase the national deficit. In fact, as seen in recent budget debates, the government may actually reduce benefits and cost shift further to the private sector in order to balance the national budget - without concurrently addressing access to care for the uninsured.
Jack K. Shelton and Julia Mann Janosi
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TREND OF HEALTH CARE COSTS AND OTHER SECTOR EXPENDITURES AS A PERCENTAGE OF GNP
(40) 1S8O
Fig. 2. Trend of health care costs and other sector expenditures as a percentage of GNP.
priorities. To the extent we are unwilling to make conscious choices among priorities, national debt will grow instead. Higher health care costs affect the ability of U.S. businesses to compete and reduce the nation's standard of living. Economist Uwe Reinhardt has commented: "Health care today may, indeed, mortgage our nation's future competitiveness" (Reinhardt, 1989, p. 9). Business finances a good part of the U.S. health care system. Companies pay for their employees' health care benefits, and also pay taxes that support Medicare and Medicaid. In addition, providers cost shift their bad debt/charity care to private payers in order to be reimbursed. U.S. corporations must be financially healthy in order to continue financing the nation's health care benefits. However, to remain viable, companies need to be able to predict the level of their health care costs as part of their overall budgeting and planning function. Predictable costs enable companies to set strategic priorities and allocate financial resources. The present system of open-ended financing and unpredictable costs are inherently elusive to cost control and business planning.
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V. COST CONTAINMENT
Although this or the other firm has claimed resounding success with these techniques in the employee-benefits literature, overall and at the practical level they clearly have failed, as can be inferred from the data routinely collected by employee-benefit specialists such as Hewitt Associates. These data suggest that, during the period 1985-89, the average cost per employee of employer-provided health insurance has risen by an annual compound rate in excess of 13 percent. During the same period, average per-capita health spending for all Americans (including the aged) rose by only about 8.3 percent (1990, p. 6).
Corporate cost containment efforts may address the problem on an individual basis, but each firm cannot change many of the
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Cost containment efforts (such as utilization review, second surgical opinion, and co-payments) require administrative resources that add to the expense and complexity of providing health care with marginal utilization reductions. It has been estimated that administrative costs require eight to ten cents of every health care dollar, though other studies indicate the costs are higher. Ford has been very aggressive on cost containment and has tried virtually every cost control measure available. The initiative have contained Ford's cost increases to a lower than expected, though not acceptable, rate of increase and still are not predictable. In 1990, cost containment programs are estimated to have reduced Ford's costs by about $169 million. Traditional' cost containment programs, designed primarily to reduce utilization of benefits, are estimated to account for $48 million of the savings. The majority of the estimated savings, $121 million, are related to 'structural' changes that either alter the way health care is delivered (e.g., HMO's and PPOs) or substantially alter the plan design and shift costs to the beneficiaries (e.g., co-payments and deductibles). Implementing or increasing co-pays and deductibles only modestly reduce the total system's costs because these mechanisms primarily shift costs from one payer to another, rather than reduce total health care utilization and costs. Despite Ford's and other companies' containment efforts, costs have continued to rise and are projected to continue increasing at double-digit rates for the near term. As Uwe Reinhardt points out, cost containment efforts by business have not succeeded:
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Jack K. Shelton and Julia Mann Janosi
VI. CONTRIBUTING FACTORS
The health care system's fianancing mechanism that removes payment decisions from the marketplace and encourages health care spending is one factor that contributes to the nation's high health care costs. By disconnecting payment responsibility from the consumer and by not controlling the supplier who directly controls the goods and is the one who benefits from oversupplying it, the system provides strong incentives for providers and consumers to give and receive care without concern for cost. One of the interesting characteristics of the U.S. health system is that the person with the authority to provide and price health services is also the one who determines the demand for and mix of health care services - namely, the physician. Though patients make the initial decision to see their physician, once they enter the health system their physician determines what health resources the patient requires. In the United States, physicians are said to control 70% of total health care costs (Ginzberg, 1987, p. 1152). The U.S. health care system competes on services, not price, which drives prices up and actually tends to increase, not decrease, overall expenditures. In fact, research by Health Care Investment Analysts, Inc. finds prices are generally higher in competitive, multi-hospital markets than in areas served by only one hospital (Bacon, 1990, p. A-l). The U.S. system of health care is governed neither by a competi-
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market conditions they face such as cost shifting, the utilization of physician-directed health services, and the diffusion of technology. As long as business cannot change these factors, its response to increasing costs will be limited. Some companies can shift costs or drop their health benefit programs, but the high cost base of U.S. health expenditures and the long term rates of increase will remain. The only way to control health care costs in the private sector may be in corporation with the government. The huge presence of the government in the health care market adversely affects business with its cost shifting. A joint effort where all payers pay fairly can benefit business and control its costs. Therefore, some type of reform is needed that provides a partnership of all consumers, providers, business and government in order to form an equitable solution to the problem of cost and access.
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VII. ACCESS AND COSTS
Why is it that all other industrialized nations (except for South Africa) can provide universal access to care for their citizens and, at the time, spend less per capita on health care than the United States? For example, in 1989, U.S. health care costs per capita were 40% higher than Canada's, 91% higher than West Germany's, 127% higher than Japan's, and 182% higher than the United Kingdom's (Schieber and Poullier, 1991, p. 113). There are many
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tive market nor by regulation, but instead exists in a gray area between the two. A competitive marketplace requires bargaining by well-informed individuals who can judge whether they are paying a price they find acceptable for the service they receive. Most patients do not have the knowledge to make this decision and are not clearheaded at the time they are required to do so. A competitive marketplace also requires that consumers be able to receive detailed data on the service they wish to receive; however, detailed data on providers is usually not collected, is usually not shared or, if it is shared, is usually not comparable between providers. The U.S. health care system is not regulated in the sense that the supplier is not told by a government authority how much they can charge consumers for using their services. It also is not governed in terms of oversupply or price constraints. Though many regulations to control supply and plan health care services were implemented during the 1970s (e.g., state health planning agencies, certificate of need programs, and state facilities plans), most have been eliminated. Without price competition or regulation, the U.S. health care system lacks both of the traditional means of controlling costs. In addition, there are other characteristics of the U.S. health care system which contribute to the rising cost of health care. As William B. Schwartz discusses, there are several underlying factors that encourage the spiraling costs. Specifically, he points to continuing advances in technology, population growth and rising input prices. He claims that cost containment measures provide only temporary relief and, in the long run, "costs could be expected to increase once again unless regulatory measures or changes in reimbursement mechanisms were implemented" (Schwartz, 1987, p. 221).
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Jack K. Shelton and Julia Mann Janosi
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differences among industrialized countries which lead to lower health costs as a percentage of GDP than in the United States; however, no industrialized nation has provided universal access to health care for its citizens without concurrently adopting a strong, coordinated plan (including negotiated budgets) to control costs. None of these health care systems have open-ended financing; instead they have control over the supply side through hospital budgets and physician payment rates. Other countries can guarantee access because they control and can predict their health care costs. The removal of open-ended financing is essential if the nation is going to contain health care costs and provide universal access to health care. Strong cost containment and the security of broad access to health care services cannot occur unless the government assumes a primary involvement in controlling the nation's health care costs. In the United States, the private sector lacks the leverage necessary to implement uniform reimbursement rates or an expenditure budget without legislative action. Presently, the private sector also lacks the consensus needed to manage a legislative change due to fragmentation among the business community as to what changes are necessary and how the system should be financed. Changing the nation's health system also is difficult because of the health care industry's size and power. The health industry is an influential buyer of services and goods, one of the largest employers in the United States, and one of the nation's largest political action committee (PAC) contributors. In fact, during a 15month period in March 1990, the American Medical Association ranked second in the amount of receipts on the election commission's list of the top 50 PACs, second in total spending, and seventh in the amount of cash on hand (Consumer Reports, 1990, p. 609). Overcoming such a powerful force will take a concerted effort on the part of business unless the Administration decides to intervene and focus on the problems of the health system. It may be surprising that business should advocate government involvement in the nation's health care system. After all, big business generally resists government intervention on the grounds that freedom of enterprise is necessary to produce a vigorous economy and to provide goods and services efficiently. However, the government already has a large presence in the nation's health care system through its bargaining of more than
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VIII. FORD'S POSITION
What sort of government role and cost containment efforts are Ford advocating? These are difficult questions, but ones that need to be addressed. Presently, Ford is deliberating these questions both internally and within several coalitions with which Ford is involved. Hopefully, some answers will become clear soon. At this time, Ford does not advocate any specific national health care reform measures; however, Ford has developed principles it believes should be included in health system reform. These principles are: - universal coverage; - quality assurance programs to eliminate inefficient and inappropriate care; - administrative simplicity to reduce bureaucracy and unnecessary expense; - cost containment including malpractice reform and national expenditure budgets; and - a financing mechanism that spreads costs equitably over the total economy. Ford uses these five principles as parameters when discussing health system reform and reviewing reform proposals. Ford believes the U.S. health care cost problem is directly associated with the problem of access to care; one problem cannot be successfully addressed without also addressing the other. In order to implement universal access to care, strong control measures must also be in place or costs will increase at an even faster rate as millions of people enter the health system. Supply side controls and negotiated budgets are necessary if costs are to be contained.
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40% of the health services purchased in the United States. As the largest single purchaser of health care, the government already makes decisions that substantially affect the private sector in the health care market. The government sector needs to partner with the private sector if both are going to control its health care costs and universal access can be achieved. Otherwise, the private sector will continue to be adversely affected by the public sector's cost shifting.
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Jack K. Shelton and Julia Mann Janosi IX. CONCLUSION
NOTES 1 An exception to this statement is the German system, which is largely privately financed, though not 'voluntary' privately financed. See the New England Journal of Medicine, Vol. 324,1991, pp. 503-508. 2 FASB (the Financial Standards Accounting Board) is an independent organization that sets the accounting standards corporations must conform to in preparing their financial statements. FASB has ruled that, beginning in 1993, corporations must show on their books the accrued costs for retiree health care - similar to the way pension costs are handled - rather than account for them as pay-asyou-go costs. This change will increase company costs by 3 to 7 times the present pay-as-you-go costs for retirees, depending upon the maturity of the company. Increases of this magnitude will dramatically impact companies' operating profits.
REFERENCES Bacon, K.H.: 1990, 'Hospital construction booms, driving cost of health care up', The Wall Street Journal LXXI (60), A - l , A-12. Consumer Reports: 1990, The crisis in health insurance', September, 608-617. Ginzberg, E.: 1987, 'A hard look at cost containment*, The New England Journal of Medicine 316,1151-1154. Levit, K.R. and Cowan, C.A.: 1990, The burden of health care costs: Business, households, and governments', Health Care Financing Review 12,127-137. Reinhardt, U.E.: 1989, Personal correspondence to Jack K. Shelton, dated July 14, 1989,1-11.
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When it comes to this nation's health care, we cannot afford business as usual. The Health Care Financing Administration has estimated health care costs will reach $1.5 trillion, or 15% of the annual GNP, by the year 2000. Other health economists have projected the costs will reach $2 trillion, or 20% of the annual GNP, by year 2000. The United States must decide to allocate its national resources to providing universal access to health care without, at the same time, underspending on education, research and development, and the nation's highways and bridges - critical elements that contribute directly to the nation's well being and competitiveness with other industrialized countries. These issues are broader than any one company, industry, state, or region. At Ford, we believe this is a serious national problem, requiring a national response.
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Reinhardt, U.E.: 1990, Unpublished paper. If health care is killing you, whom should we blame?', presented July 31,1990,1-9. Schieber, GJ. and Poullier, J.: 1991, International health spending: Issues and trends'. Health Affairs 10,106-116. Schwartz, W.B.: 1987, The inevitable failure of current cost-containment strategies', JAMA 257,220-224.
UNHEALTHY HEALTH CARE COSTS
Key Words: access, cost containment, health care system reform I. INTRODUCTION
Business is concerned about this nation's rapidly escalating health care costs and the impact these expenditures have on the access to and quality of health care. Businesses have struggled to control heakh care costs while attaining high quality health care for their employees. Many businesses have implemented cost control measures to reduce the rates of increase. However, despite high expectations, cost containment measures have not been successful in limiting health care cost increases. While some companies have reported success, their achievement is short term since high rates of increase return within a few years. In addition, though some companies experience short term rate reductions, the costs of the total health system have not been reduced. The temporary relief offered by cost containment measures has compelled many business leaders to discuss health care affordability and, in an attempt to have a long term impact on health care spending, to advocate reforming the national health care system. Suggested reform measures include a national health care Jack K. Shelton, Manager, Employee Insurance Department, Ford Motor Company, The American Road, Room 828, Dearborn, Michigan 48121-1899, U.SJ\. Julia Mann Janosi, Senior Health Policy Analyst, Employee Insurance Department, Ford Motor Company, The American Road, Room 828, Dearborn, Michigan 48121-1899, U.S.A. The Journal of Medicine and Philosophy 17:7-19,1992. 01992 Kluvxr Academic Publishers. Printed in the Netherlands.
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ABSTRACT. The private sector has implemented many cost containment measures in efforts to control rising health care costs. However, these measures have not controlled costs in the long run, and can be expected not to succeed as long as business cannot control factors within the health care system which affect costs. Controlling private sector health care costs requires constraints on cost shifting which necessitates a unified financing system with expenditure limits. A unified financing system will involve a partnership between the public and private sectors.
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Jack K. Shelton and Julia Mann Janosi
II. FORD MOTOR COMPANY AND HEALTH CARE COSTS The escalating costs of the U.S. health care system pose serious problems for both business and the country. The United States has the most expensive health care system in the world. Costs have increased, on average, at double-digit rates over the past 20 years, with similar levels of increase projected for the future. In addition, the United States has the only health care system in the industrialized world where the private sector, not the government, voluntarily finances the majority of health benefits for workers, retirees, and their dependents. 1 The problem of uncontrollable health care costs is an important issue at Ford Motor Company because health care is one of Ford's largest costs of doing business. Blue Cross and Blue Shield is Ford's largest health care supplier and the second largest supplier to Ford overall. In 1990, company health care costs were about $400 per vehicle and, when the health care costs of Ford's suppliers are included, health care costs are estimated to be about
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budget to put a brake on the present rate of cost increases. Though expenditure limits may seem radical, other attempts at cost containment have not worked and can be expected not to succeed in the future. Expenditure limits may be the last hope to control costs and provide access to care for the uninsured. Controlling costs and implementing a national health care budget will require government involvement. As the largest purchaser of health care, the government can unilaterally make changes that frustrate private sector cost control efforts. In the past, the government has shifted costs to the private sector by cutting back on Medicare benefits, underpaying Medicaid providers, and implementing DRG reimbursement rates. These cost containment measures by the federal government have not reduced the costs of the health care system, but instead resulted in cost shifting from public programs to private payers. In fact, cost shifting can constitute up to 25% or more of a privately insured patient's costs. Further shifting can be expected to occur when the government implements relative value scale (RVS) reimbursement rates. The private sector cannot contain its health care costs if cost shifting from the public sector continues to frustrate its efforts. The private and public sectors must work together if cost containment is to be successful in both sectors.
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III. ACCESS TO CARE
Despite high expenditures for health care, the United States is one of the few health systems in the industrialized world where a significant portion of the population (15% to 18% of the U.S. population under age 65) is without health insurance coverage. All other industrialized countries (except for South Africa) are able to provide universal access to care for their people and have lower per capita health care spending than the United States. These countries employ national cost containment controls and regulatory measures, including expenditure limits, to contain their costs. In the United States, the increase in the number of uninsured
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$675 per vehicle. In comparison, Ford estimates its Japanese import competition has health care costs of less than half this amount. Ford's experience with increasing health care costs has been similar to the national trend. Between 1970 and 1990 Ford's health care expenditures increased, on average, 11.2% annually; total U.S. health care expenditures for the same period increased, on average, 11.5% annually. Ford's health care costs for U.S. automative operations were $1.2 billion in 1990 or about 18% of payroll compared with a 6% level in 1970. Ford is projecting its health care costs, under business as usual conditions, will reach $2 billion by 1996 - doubling 1988 costs. This projection is without consideration of the impact on the corporate balance sheet of the Financial Accounting Standards Board (FASB) requirement for retiree health care accounting which will substantially increase Ford's booked costs.2 The problem of rising health care costs is not unique to Ford or auto companies; the double-digit rates of increase in health care costs affect all industries. According to the Health Care Financing Administration, spending for health services in 1989 was over 56% of before-tax corporate operating profits and 100.5% of after tax profits (K.R. Levit and C.A. Cowan, 1990, p. 133). The present slowdown in the economy and decline in corporate operating profits can be expected to exacerbate the health care cost and access problems. When the FASB requirement becomes effective, accounted health care costs may well exceed operating profits for many companies.
COSTS AS PERCENT OF GNP UNINSURED
40
MILLIONS
1977 1978 1979 1980
1981 1982 1983 1984 1985 1986 1987 1988
0 UBBBB-JMML—•BBB-JBBBfc-JHBBL-MBBLJHHBB_-BIMBB_J^H^l»»MMM-JMMLJBBHBJ 0
12.0
PERCENT
HEALTH CARE COSTS AND THE UNINSURED 1977 - 1988
UNITED STATES
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Unhealthy Health Care Costs
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IV. NATIONAL PRIORITIES As the nation's health care spending continues to increase and consume greater amounts of the country's GNP, it affects the allocation of resources to other national priorities such as education, research and development, and the rebuilding of the nation's crumbling infrastructure. These are important needs for the nation's future and areas that directly affect the ability of U.S. business to compete in global markets. From 1970 to 1989, health care costs grew from 7.4% to 11.5% of GNP. As illustrated in Figure 2, on a cumulative percentage basis relative to GNP, that is an increase of 56%. At the same time (on a cumulative percentage basis of GNP), education decreased 8.5% and basic science research and development stayed relatively flat, growing only 2.6%. However, national debt, on a cumulative percentage basis relative to GNP, grew 47% (nearly as rapidly as health care costs) and, in 1989, national debt reached 55% of the annual GNP. Our country's allocation of resources reflects our national
Downloaded from http://jmp.oxfordjournals.org/ at University of Massachusetts Medical School on April 13, 2015
people closely parallels the increase in health care costs as a percentage of GNP (as illustrated in Figure 1). As the cost of providing health benefits increases, many employers have reduced or eliminated the coverage they provide for their employees, contributing to the growth in the number of uninsured people. Eliminating health coverage may be a last resorf cost containment measure for many companies (especially small businesses) that are forced to eliminate employees' health care coverage in order to stay in business. Government programs also are affected by the rising cost of providing health care. The federal government is caught between responding to the needs of the uninsured population while being constrained by the federal deficit and the national budget. Even without implementing universal access to care, the Medicare and Medicaid programs accounted for 10% of the federal budget in 1988. It may be expected that the government will not address the problem of access to care if, in doing so, such programs would increase the national deficit. In fact, as seen in recent budget debates, the government may actually reduce benefits and cost shift further to the private sector in order to balance the national budget - without concurrently addressing access to care for the uninsured.
Jack K. Shelton and Julia Mann Janosi
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TREND OF HEALTH CARE COSTS AND OTHER SECTOR EXPENDITURES AS A PERCENTAGE OF GNP
(40) 1S8O
Fig. 2. Trend of health care costs and other sector expenditures as a percentage of GNP.
priorities. To the extent we are unwilling to make conscious choices among priorities, national debt will grow instead. Higher health care costs affect the ability of U.S. businesses to compete and reduce the nation's standard of living. Economist Uwe Reinhardt has commented: "Health care today may, indeed, mortgage our nation's future competitiveness" (Reinhardt, 1989, p. 9). Business finances a good part of the U.S. health care system. Companies pay for their employees' health care benefits, and also pay taxes that support Medicare and Medicaid. In addition, providers cost shift their bad debt/charity care to private payers in order to be reimbursed. U.S. corporations must be financially healthy in order to continue financing the nation's health care benefits. However, to remain viable, companies need to be able to predict the level of their health care costs as part of their overall budgeting and planning function. Predictable costs enable companies to set strategic priorities and allocate financial resources. The present system of open-ended financing and unpredictable costs are inherently elusive to cost control and business planning.
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V. COST CONTAINMENT
Although this or the other firm has claimed resounding success with these techniques in the employee-benefits literature, overall and at the practical level they clearly have failed, as can be inferred from the data routinely collected by employee-benefit specialists such as Hewitt Associates. These data suggest that, during the period 1985-89, the average cost per employee of employer-provided health insurance has risen by an annual compound rate in excess of 13 percent. During the same period, average per-capita health spending for all Americans (including the aged) rose by only about 8.3 percent (1990, p. 6).
Corporate cost containment efforts may address the problem on an individual basis, but each firm cannot change many of the
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Cost containment efforts (such as utilization review, second surgical opinion, and co-payments) require administrative resources that add to the expense and complexity of providing health care with marginal utilization reductions. It has been estimated that administrative costs require eight to ten cents of every health care dollar, though other studies indicate the costs are higher. Ford has been very aggressive on cost containment and has tried virtually every cost control measure available. The initiative have contained Ford's cost increases to a lower than expected, though not acceptable, rate of increase and still are not predictable. In 1990, cost containment programs are estimated to have reduced Ford's costs by about $169 million. Traditional' cost containment programs, designed primarily to reduce utilization of benefits, are estimated to account for $48 million of the savings. The majority of the estimated savings, $121 million, are related to 'structural' changes that either alter the way health care is delivered (e.g., HMO's and PPOs) or substantially alter the plan design and shift costs to the beneficiaries (e.g., co-payments and deductibles). Implementing or increasing co-pays and deductibles only modestly reduce the total system's costs because these mechanisms primarily shift costs from one payer to another, rather than reduce total health care utilization and costs. Despite Ford's and other companies' containment efforts, costs have continued to rise and are projected to continue increasing at double-digit rates for the near term. As Uwe Reinhardt points out, cost containment efforts by business have not succeeded:
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VI. CONTRIBUTING FACTORS
The health care system's fianancing mechanism that removes payment decisions from the marketplace and encourages health care spending is one factor that contributes to the nation's high health care costs. By disconnecting payment responsibility from the consumer and by not controlling the supplier who directly controls the goods and is the one who benefits from oversupplying it, the system provides strong incentives for providers and consumers to give and receive care without concern for cost. One of the interesting characteristics of the U.S. health system is that the person with the authority to provide and price health services is also the one who determines the demand for and mix of health care services - namely, the physician. Though patients make the initial decision to see their physician, once they enter the health system their physician determines what health resources the patient requires. In the United States, physicians are said to control 70% of total health care costs (Ginzberg, 1987, p. 1152). The U.S. health care system competes on services, not price, which drives prices up and actually tends to increase, not decrease, overall expenditures. In fact, research by Health Care Investment Analysts, Inc. finds prices are generally higher in competitive, multi-hospital markets than in areas served by only one hospital (Bacon, 1990, p. A-l). The U.S. system of health care is governed neither by a competi-
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market conditions they face such as cost shifting, the utilization of physician-directed health services, and the diffusion of technology. As long as business cannot change these factors, its response to increasing costs will be limited. Some companies can shift costs or drop their health benefit programs, but the high cost base of U.S. health expenditures and the long term rates of increase will remain. The only way to control health care costs in the private sector may be in corporation with the government. The huge presence of the government in the health care market adversely affects business with its cost shifting. A joint effort where all payers pay fairly can benefit business and control its costs. Therefore, some type of reform is needed that provides a partnership of all consumers, providers, business and government in order to form an equitable solution to the problem of cost and access.
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VII. ACCESS AND COSTS
Why is it that all other industrialized nations (except for South Africa) can provide universal access to care for their citizens and, at the time, spend less per capita on health care than the United States? For example, in 1989, U.S. health care costs per capita were 40% higher than Canada's, 91% higher than West Germany's, 127% higher than Japan's, and 182% higher than the United Kingdom's (Schieber and Poullier, 1991, p. 113). There are many
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tive market nor by regulation, but instead exists in a gray area between the two. A competitive marketplace requires bargaining by well-informed individuals who can judge whether they are paying a price they find acceptable for the service they receive. Most patients do not have the knowledge to make this decision and are not clearheaded at the time they are required to do so. A competitive marketplace also requires that consumers be able to receive detailed data on the service they wish to receive; however, detailed data on providers is usually not collected, is usually not shared or, if it is shared, is usually not comparable between providers. The U.S. health care system is not regulated in the sense that the supplier is not told by a government authority how much they can charge consumers for using their services. It also is not governed in terms of oversupply or price constraints. Though many regulations to control supply and plan health care services were implemented during the 1970s (e.g., state health planning agencies, certificate of need programs, and state facilities plans), most have been eliminated. Without price competition or regulation, the U.S. health care system lacks both of the traditional means of controlling costs. In addition, there are other characteristics of the U.S. health care system which contribute to the rising cost of health care. As William B. Schwartz discusses, there are several underlying factors that encourage the spiraling costs. Specifically, he points to continuing advances in technology, population growth and rising input prices. He claims that cost containment measures provide only temporary relief and, in the long run, "costs could be expected to increase once again unless regulatory measures or changes in reimbursement mechanisms were implemented" (Schwartz, 1987, p. 221).
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differences among industrialized countries which lead to lower health costs as a percentage of GDP than in the United States; however, no industrialized nation has provided universal access to health care for its citizens without concurrently adopting a strong, coordinated plan (including negotiated budgets) to control costs. None of these health care systems have open-ended financing; instead they have control over the supply side through hospital budgets and physician payment rates. Other countries can guarantee access because they control and can predict their health care costs. The removal of open-ended financing is essential if the nation is going to contain health care costs and provide universal access to health care. Strong cost containment and the security of broad access to health care services cannot occur unless the government assumes a primary involvement in controlling the nation's health care costs. In the United States, the private sector lacks the leverage necessary to implement uniform reimbursement rates or an expenditure budget without legislative action. Presently, the private sector also lacks the consensus needed to manage a legislative change due to fragmentation among the business community as to what changes are necessary and how the system should be financed. Changing the nation's health system also is difficult because of the health care industry's size and power. The health industry is an influential buyer of services and goods, one of the largest employers in the United States, and one of the nation's largest political action committee (PAC) contributors. In fact, during a 15month period in March 1990, the American Medical Association ranked second in the amount of receipts on the election commission's list of the top 50 PACs, second in total spending, and seventh in the amount of cash on hand (Consumer Reports, 1990, p. 609). Overcoming such a powerful force will take a concerted effort on the part of business unless the Administration decides to intervene and focus on the problems of the health system. It may be surprising that business should advocate government involvement in the nation's health care system. After all, big business generally resists government intervention on the grounds that freedom of enterprise is necessary to produce a vigorous economy and to provide goods and services efficiently. However, the government already has a large presence in the nation's health care system through its bargaining of more than
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VIII. FORD'S POSITION
What sort of government role and cost containment efforts are Ford advocating? These are difficult questions, but ones that need to be addressed. Presently, Ford is deliberating these questions both internally and within several coalitions with which Ford is involved. Hopefully, some answers will become clear soon. At this time, Ford does not advocate any specific national health care reform measures; however, Ford has developed principles it believes should be included in health system reform. These principles are: - universal coverage; - quality assurance programs to eliminate inefficient and inappropriate care; - administrative simplicity to reduce bureaucracy and unnecessary expense; - cost containment including malpractice reform and national expenditure budgets; and - a financing mechanism that spreads costs equitably over the total economy. Ford uses these five principles as parameters when discussing health system reform and reviewing reform proposals. Ford believes the U.S. health care cost problem is directly associated with the problem of access to care; one problem cannot be successfully addressed without also addressing the other. In order to implement universal access to care, strong control measures must also be in place or costs will increase at an even faster rate as millions of people enter the health system. Supply side controls and negotiated budgets are necessary if costs are to be contained.
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40% of the health services purchased in the United States. As the largest single purchaser of health care, the government already makes decisions that substantially affect the private sector in the health care market. The government sector needs to partner with the private sector if both are going to control its health care costs and universal access can be achieved. Otherwise, the private sector will continue to be adversely affected by the public sector's cost shifting.
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Jack K. Shelton and Julia Mann Janosi IX. CONCLUSION
NOTES 1 An exception to this statement is the German system, which is largely privately financed, though not 'voluntary' privately financed. See the New England Journal of Medicine, Vol. 324,1991, pp. 503-508. 2 FASB (the Financial Standards Accounting Board) is an independent organization that sets the accounting standards corporations must conform to in preparing their financial statements. FASB has ruled that, beginning in 1993, corporations must show on their books the accrued costs for retiree health care - similar to the way pension costs are handled - rather than account for them as pay-asyou-go costs. This change will increase company costs by 3 to 7 times the present pay-as-you-go costs for retirees, depending upon the maturity of the company. Increases of this magnitude will dramatically impact companies' operating profits.
REFERENCES Bacon, K.H.: 1990, 'Hospital construction booms, driving cost of health care up', The Wall Street Journal LXXI (60), A - l , A-12. Consumer Reports: 1990, The crisis in health insurance', September, 608-617. Ginzberg, E.: 1987, 'A hard look at cost containment*, The New England Journal of Medicine 316,1151-1154. Levit, K.R. and Cowan, C.A.: 1990, The burden of health care costs: Business, households, and governments', Health Care Financing Review 12,127-137. Reinhardt, U.E.: 1989, Personal correspondence to Jack K. Shelton, dated July 14, 1989,1-11.
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When it comes to this nation's health care, we cannot afford business as usual. The Health Care Financing Administration has estimated health care costs will reach $1.5 trillion, or 15% of the annual GNP, by the year 2000. Other health economists have projected the costs will reach $2 trillion, or 20% of the annual GNP, by year 2000. The United States must decide to allocate its national resources to providing universal access to health care without, at the same time, underspending on education, research and development, and the nation's highways and bridges - critical elements that contribute directly to the nation's well being and competitiveness with other industrialized countries. These issues are broader than any one company, industry, state, or region. At Ford, we believe this is a serious national problem, requiring a national response.
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Reinhardt, U.E.: 1990, Unpublished paper. If health care is killing you, whom should we blame?', presented July 31,1990,1-9. Schieber, GJ. and Poullier, J.: 1991, International health spending: Issues and trends'. Health Affairs 10,106-116. Schwartz, W.B.: 1987, The inevitable failure of current cost-containment strategies', JAMA 257,220-224.
