Patient Power: Solving America's Health Care Crisis.

Health care is an issue that could easily dominate the domestic political agenda in the 1990s and beyond. It is widely believed that America's health care industry is in crisis, providing fewer people with acceptable care at increasingly unacceptable costs, and that the only way to solve this crisis is for the federal government to increase its role in health care decisions. Undeniably, there are serious problems in the way health care is delivered and paid for in the United States. Improvements can and should be made. But in the rush to make improvements, three things should be kept in mind. First, the health care system is in better shape than recent political pronouncements of a "crisis" have led the American public to believe. Second, many health care problems we do face are the result of existing government policies that distort incentives in the market for health care. Third, many of the proposed solutions to the health care "crisis" would make matters worse.

These cautions will be dismissed by those convinced that our health care system is so bad that making it any worse would be difficult. These people should get a copy of Patient Power: Solving America's Health Care Crisis, by John Goodman and Gerald Musgrave, and read it with care. The more widely the information contained in this book is disseminated, the better the chance that health care reform will be constructive rather than destructive.

Goodman and Musgrave provide an extraordinarily complete explanation of 1) the evolution of the U.S. health care system, 2) the role of government policy in that evolution, 3) the policy-induced distortions in the health care market, 4) alternative policies that would solve many problems that plague the current system by increasing the role of the patient in health care decisions, and 5) the enormous strengths of the U.S. health care system compared to the health care systems in other countries commonly held up as preferred alternatives.

From the end of World War II until about the mid-1980s, hospital and health care was financed largely through a cost-plus system. Hospitals, for example, relied increasingly on third-party payers (either insurance or government), rather than the consumers of health care, to cover their expenses. And third-parties paid hospitals on the basis of costs rather than charges tied to specific services. For example, if Blue Cross patients accounted for one-third of a hospitals patient days, Blue Cross would pay one-third of the hospital's total costs. The result was little motivation for health care providers to control their costs, and not surprisingly costs increased rapidly.

Because there is a limit on how much society is willing to spend on health care, there is an inevitable evolution into what Goodman and Musgrave refer to as the cost-control phase (or stage 2) of the cost plus system. In this stage numerous third-party payers attempt to limit their portion of the increasingly costly health care bill. The result is less cost containment and more cost shifting, with suppliers of medical care also frustrating cost containment by exploiting reimbursement formulas to increase their income. In the third (and final) stage of the cost plus system, government assumes a dominant role--determining what medical technology is permissible, who is eligible to receive particular medical treatments, and how much can be charged for different medical procedures and services. Most major industrial countries have already moved well into this third stage with national health care systems, and the chances seem good that the United States is about to follow with federal health care reform.

The state governments have been involved in the health care market in a major way since the early 20th century by determining the acceptability of medical schools and licensing doctors. Also, states either outlawed proprietary (for-profit) hospitals, or imposed serious competitive disadvantages on them, so the percentage of these hospitals declined significantly until the 1970s. By restricting the supply of physicians and by reducing the role of residual claimants to hospital profits, these interventions served to increase the costs of medical services. Government action added further to the cost-increasing pressures on health care by the type of health insurance it fostered. Originally, health insurance possessed many of the same features as other types of insurance: different prices for different risks and coverage primarily for high-cost contingencies against which it is risky to self-insure. However, with the assistance of state regulations and physician organizations, Blue Cross and Blue Shield achieved a near-monopoly position in health care insurance and pursued two objectives: 1) a system of community rating in which everyone in each area paid the same price, and 2) first-dollar coverage for all medical expenses. First-dollar coverage has also been greatly encouraged by federal and state tax policies that exclude employer-provided health insurance from employees' taxable income. Also, state governments have effectively outlawed inexpensive, no-frills coverage (except for large firms that self-insure under federal law) with laws bowing to a host of special interest pressures to require coverage for particular diseases and treatments.

The reality is that genuine insurance for health care is either unavailable because of legal restrictions, or unattractive because of tax considerations. Instead, what most people now have is an arrangement through their employer to prepay for health care with pre-tax dollars. The result is a perverse set of incentives. Health care consumers face a moral hazard (prisoners' dilemma) problem in which it is individually rational to behave in ways that are collectively irrational. Under complete first-dollar coverage individuals have an incentive to consume health care until its marginal value is zero. Yet each will end up paying insurance premiums caused by the excessive consumption of everyone else. In essence, medical care resources have been turned into a commons by existing public policy, with most patients having little incentive to conserve on their use.

The high costs and inefficiencies that result from the excessive use of medical care resources can be eliminated only by reform that results in people spending their own money for routine medical care while allowing them to purchase real health insurance--i.e., protection against the financial burden of catastrophic illness. Goodman and Musgrave propose to achieve this goal through medical savings accounts or medical IRAs. Under the proposal, people would be allowed to choose high deductible policies and put the savings (tax free) into an account that would be used to pay for small medical bills not covered by health insurance. Funds not spent would grow tax free and could be rolled into an IRA or other pension plan at the time of retirement.

By virtue of the fact that they would be spending their own money and paying real prices for health care services, patients would find it in their self-interest to become prudent buyers of health care and providers would have incentives to cut costs and deliver care more efficiently.

With cost containment, coupled with the availability of real insurance for catastrophic illnesses and broader tax incentives to purchase such insurance, the Goodman-Musgrave proposal would result in a significant move toward universal coverage. Of course, no matter how health care is reformed, some people will always fall between the cracks. But Goodman and Musgrave can point to savings from their proposal that will cover most, if not all, of the cost of providing care for those who are not covered with health insurance.

For those who, despite having read most of Patient Power, remain convinced that some form of national health care system is the answer to America's health care problems. Chapter 17 could be the equivalent to the light on the road to Damascus. This chapter presents twenty widely held beliefs about the advantages of national health care programs in other countries and exposes them as myths. This is a powerful chapter and Patient Power would be a bargain if this were the only chapter it contained. Reading this chapter is a low-cost substitute for the futile search for a national health care system that the United States should use as a model, a search that always has to continue once we find out enough about the currently fashionable system.

As this review is being written, Hillary R. Clinton and her health care task force are finishing up their work, and their reform proposals will soon be made public. Let us hope that Hillary and her friends have read Patient Power and as "agents of (hopefully beneficial) change" have incorporated its insights into their recommendations. Unfortunately, hope is likely to be frustrated given rumors that massive tax increases will be needed to finance those health care proposals. By contrast, the Goodman and Musgrave proposals would improve the quality and reduce the costs of our health care system.