The good health guide.

Yes, Senator Wofford, American health care needs improvement. No, more federal regulation is not the answer.

HEALTH CARE is now probably the world's largest industry, and just about the least efficient. All the big rich countries run slightly different anti-competitive systems. The combined waste and cruelty from them are enormous. This is a field where caring" statesmen, by interfering with logical market forces, kill or keep in pain millions of people a year. It is now possible to see what sort of competitive system all rich countries will eventually have to move to. We 68-year-olds (I was born in 1923) naturally think the move is urgent. A man or woman aged over 75 uses ten times as much health care as the average person aged between twenty and fifty. During the next three decades all rich countries are going to have far more 75year-olds, quite soon including me.

The international drive to reform will have four main barriers in the way. First, the politicians. They will try to make all "reforms" as populist and yet as obsequious to entrenched interests as possible. In an industry where the use of cost-reducing technology ought to be increasing quickly, that is disastrous.

The temptation for politicians is to make health care "free" (i.e., paid for by insurers or taxpayers) at the point of delivery. When supply is thus free," demand becomes infinite. If demand is infinite, the incentives for innovating and reducing costs disappear. Production is in the hands of politician-created institutions instead of market-obeying ones, in a situation of constant over-demand with power held by existing producers. This is Brezhnevism (i.e., the last stage of Soviet Communism, which crashingly failed). If you live in a small town or suburb, the largest business will often be the local hospital. The reforms advocated by caring" politicians could make that largest business in town as overstaffed, inefficient, and incompatible with modem technology as a Soviet steelworks in Omsk.

The second barrier to reform will come from protectionist medical lobbies, including the doctors. They operate some of the worst pre- and post-entry restrictive practices in any business in the world, unfortunately often to public acclaim. The average American physician makes nearly $150,000 a year in an industry which does not work properly, so he is not an ardent advocate of freer competition, cheapness, and reform. The right people to rule the roost in medical practice really are not distinguished sexagenarians who were expensively trained forty years ago, before either the computer revolution or the biotechnological revolution. Health care (especially diagnosis) is largely a matter of information processing, and computers enable us to process information two billion times faster than we could when the distinguished heads of our medical profession were in school. If the industry had turned competitive, it would by now have a totally different shape. We would be shopping around as much better informed customers, in an industry with alternative technologies on offer. We would be checking our case histories and body scans against computerized evidence of what had worked best in other people. We would not be agreeing so numbly when a physician tells us that the treatment we need is the one that will bring him the most money.

Many doctors will say that last paragraph is a libel. It wasn't meant to be that. My own view is that most people in medicine have acted as ministering angels, during a period when all incentives have been distorted to make them act in the worst way.

This leads to the third barrier to reform, which is that we haven't set up the right market incentives in health care for the last two thousand years. The best market leaders may have been the mandarins in ancient China, who paid village doctors only if their patients remained well. In America's fee-for-service system, the incentive to the hospital or physician is to treat you in the most expensive possible way after you become ill. On top of this, the service is free to the customer, and thus demand approaches infinite. The bill goes to the insurance provided by your employer or to the state (Medicare or Medicaid). Unsurprisingly, America therefore spends a swelling 12 per cent of GDP on health care, while getting worse crude health figures (infant mortality, life expectancy) than some much poorer countries that spend a fraction as much.

Britain's total expenditure on health for the next year is decided by the Chancellor of the Exchequer on budget day, a moment when he does not want to raise taxes and has other government expenditures he does not want to cut. Britain therefore spends only 6 per cent of GDP on health care, but insists on nil cost to the patient, creating a virtually infinite demand which in turn runs up against the deliberately restrained supply. Hospitals and physicians then ration by waiting list, giving some priority to those operations that are most prestigious and interesting. For some boring and cold surgery (such as hip-replacement operations) waiting lists can extend for several years, leaving patients in excruciating pain.

The fourth barrier to reform is the amazing ignorance in and about this learned profession. American research is beginning to suggest that between a quarter and a third of surgical operations and other medical procedures in America and Continental Europe probably should not have been done. In Japan, which has the longest life expectancy, surgery is much less frequent. In America and Europe, there are extraordinary differences in surgery rates (and in death rates under that surgery) between different hospitals. Obviously this information should be made available to every patient, so that he can decide what treatment he prefers where. Instead, the information is often kept secret. This is particularly bad in Britain's National Health Service (NHS) hospitals. America's hospitals do partly compete with each other, but Britain's NHS hospitals are state institutions with salaried staff. These hospitals have hardly any accounting system to show what the cost of various surgical or other procedures are.

The notion of measures of "health-care output" is now spreading fast in America. Similarly, Britain has the concept of quality-adjusted life years (or QALYS), originating from the University of York. The idea of QALYs is that "health output" consists not just of extending life expectancy, but more often of saving somebody from pain, or giving him more years of being able to keep walking and coping (like dressing himself) instead of relapsing into a wheelchair or being dependent on others. When QALYs are measured, it becomes obvious that the output of Britain's NHS hospitals is hopelessly skewed. In all countries far too many resources are devoted to the last six months of life, to trying to keep a dying comatose octogenarian (like me in 2011?) living for an extra week at enormous expense. In Britain, for instance, there are too many glamorous transplant operations, and too few hip operations or other pain-relieving surgery. The right goal for a health-care system in any country is to maximize the output of QALYS, at the lowest possible cost per QALY.

Do the Fittest Survive?

HOW FAR do the health-care systems of different rich countries reach toward that ideal, or indeed accord with cruder measures of health output? Our opening figures have to come from the OECD. If you don't like tables, the rest of this paragraph summarizes what the table below startlingly says. In 1989 the cost of health care per head was $2,354 in the U.S., $1,683 in Canada, $1,282 in West Germany, $1,274 in France, $1,035 in Japan, $836 in Britain. Expenditure per head in the U. S. was therefore nearly three times that in Britain. Measures of crude health output had no correlation with money spent. Britain actually had slightly longer life expectancy for males (72.4 years versus America's 71.5) and lower infant mortality (8.4 per 1,000 live births, versus America's 9.7). The best crude health figures were in the second cheapest country, Japan. In 1989 Japan had life expectancy of 75.9 years for men, 81.8 for women, and infant mortality of a tiny 4.6 per 1,000 live births. What can we learn from each country?

Although America's health-care system is absurdly costly, it passes other international comparisons better than most Americans think. America is the most innovative country in medical research, bringing forward successful new cures for all the world. It has a superb choice of hospitals and doctors, with no waiting lists. Its output of QALYs is larger than crude figures of life expectancy and infant mortality suggest. Foreigners are shocked when first told that 35 million Americans have no insurance or state health coverage. They then discover that care for the uninsured-in hospitals which cannot turn them away-is usually actually better than in Britain's NHS hospitals for all the British people. A medical emergency can drive the inadequately insured bankrupt. It would plainly be better to extend insurance coverage with incentives for sensible behavior by both doctors and patients. But the main problem is not too little interference by politicians, but too much. State regulation of insurance companies in America is far too fussy, so that small firms often cannot economically secure coverage for their employees.

Costs in America are expanded by various absurdities, especially awards in medical malpractice suits, which have soared out of control, and now by Mandated Health Insurance Benefit laws [see box p. 301. Worse, the fee-for-service system encourages supply of the most expensive possible treatment, and the insurance and Medicare/Medicaid systems mean that demand for the most expensive treatment is too uncontained. Unoriginally, I think that the future in America must lie with health maintenance organizations (HMOs), which I use here as a generic name for any pre-payment scheme. You pay an annual fee to the HMO of your choice, and it looks after your health for the year-bargaining with the hospitals to get the lowest fees for satisfactory treatment.

The route to encouragement of HMOs that I would prefer is that advocated by Stanford University's admirable Professor Alain Enthoven. He thinks that tax exemption for employers' health insurance should extend only up to the cheapest adequate insurance policy available. If you wanted more expensive fee-for-service or other treatment, you or your employer would have to buy the insurance for that out of taxed income. The objections to HMOs (beside objections from doctors who do not like bargainers driving down their fees) come from those who rightly say that the 70 million Americans registered with HMOs have not always had the best or cheapest service, and that some HMOs have gone bust. But this is mainly because the other 180 million Americans (spending somebody else's money-insurance companies' or Medicaid's/Medicare's) have a positive incentive not to use HMOS.

All experience suggests that the HMO system would work most effectively if it were the main (though not the only) bargainer for health care in the market: able to publish hospitals' death rates, to tell particular hospitals that they should use more paramedics, and to fight the producer-dominated spendocracy on behalf of customers. The aim should be to elevate hospitals all over the world to being like other customer- and market-influenced businesses instead of like a steelworks in Omsk.

Sometimes these HMOs would make fearful mistakes. It would be discovered that the cheaper treatments they preferred for some diseases were also shoddy. In those cases people would take out private non-tax-aided insurance policies for better treatments-and competitive HMOs would quickly include them in their offers, so as to attract subscribers. The need all over the rich world is to get health care operating under the two normal incentives of free markets: the customer has to be seeking the cheapest and most effective quality treatment; the producer has to be seeking each day to improve treatment cost-effectively with an eye on what the market shows him customers want. The crucial needs are a) that the customer has to be able to choose competitively (with full information) the intermediary body which looks to him the likeliest to provide the most efficient primary care at the cheapest cost; b) that the intermediary (HMO or whatever) then has to find which hospitals and specialist physicians provide the most cost-effective secondary service; c) that the intermediary body has to have large clout over the hospitals (which, being a jargon-using economist, I call near-monopsony clout-monopsony means the power of a big buyer); but d) that when the HMOs or other intermediaries are making bad mistakes, competition from other insurance schemes should show which these mistakes are.

National Waiting Service

IT IS USUAL to say that Britain's "socialist health service" is at the opposite pole from America's. In Britain most money for health is provided through the taxpayer; in America, through employers' insurance. More important, American hospitals try to be entrepreneurial, getting fees for service if they attract patients. British hospitals have bureaucratic salaried staffs, and a low productivity per man or woman employed, because they have no incentive to be attractive or efficient. The nicest outcome for a worker in a British NHS hospital is to draw your salary without having too many of those bloody patients wanting to flock in. If you are a specialist in some sort of surgery, it is ideal to have slowly moving (not speedy) waiting lists for NHS patients for that sort of surgery. You can then tell those waiting that they can jump the line by paying for private surgery from you.

Yet the British system has two advantages. It provides life expectancy comparable to America's at about one-third the cost. And family doctors or general practitioners (GPs) in Britain-the best part of the British system-increasingly run their practices like American HMOs, although most people don't realize this.

We Britons choose which group practice of GPs we will register with. The government then pays a capitation fee to that group practice, according to the number of patients it attracts. Although silly secrecy is maintained about each practice's record, this system works well in posh London suburbs like that in which I live. One can find out from gossip at the local tennis club which doctors are drunks, and which have the best practices. And then register with the latter. The system works less well for poorer districts where doctors (unless they are ministering angels) prefer not to live. An inner-city Liverpudlian who speaks only Scouse (the Liverpool dialect) may find that the only available local doctor is an immigrant Pakistani who doesn't speak Scouse. The system should give higher capitation fees in inner cities, and much higher ones for over-75-year-olds, who give doctors ten times as much work.

Still these group practices work satisfactorily to find which patients are hypochondriacs, which need primary treatment, and which should be hospitalized (or put onto a waiting list). Emergency cases get through quickly enough, but the hospitals are the great failure of the NHS. British hospitals get no extra money for treating people efficiently at lowest cost. They are therefore fearfully overstaffed by trade-unionized workers with many restrictive practices. Collectively, British NHS hospitals have been the biggest employer in Europe except the Red Army. Now that the Red Army is being demobilized, they might soon be in elephantine top place-unless the sensible but wildly unpopular reforms that Margaret Thatcher put in train in 1990 are allowed time to work.

Under these "Thatcherite health reforms" group practices of GPs are given more control over their budgets and an incentive to find which hospitals are ready to receive their patients quickly and efficiently. (Hitherto doctors have just trundled patients along to the local hospital, however full and inefficient it was.) Hospitals, meanwhile, can opt for a new status whereby their staffs get more money if they attract more patients and handle them efficiently at lower cost. These reforms had their origin in 1985 when Alain Enthoven visited Britain and wrote a brilliant report. Since there was a danger this would be read only by NHS people, who didn't want to be uncomfortably reformed, I plagiarized it into a shorter, two-thousand-word version (with reediting by Enthoven) for The Economist. This two-thousand-word version was put into one of the bags which Mrs. Thatcher was wont to take away for recommended weekend reading. Her marginal comments on that article are said to have started the Thatcherite health reforms, which is why I am sometimes now blamed by Tory MPs among my friends for probably losing the Tories the coming election.

Any sensible reform schemes will initially be unpopular. If an overstaffed hospital makes itself more efficient, it necessarily rids itself of some staff. These are then called Tory cuts." If a group of GPs gets its patients into distant hospitals more quickly, this is called "queue jumping." If some empty hospitals in northern England-which would otherwise have had to close receive patients from waiting lists in the richer south, this is locally called "rich Londoners pinching our hospital beds." But the forward road will have to be to make group practices of British GPs more like American HMOs, and to see if competition between hospitals can be based on something other than fee for service-perhaps fee per production of QALYS?

They Do Things Differently

CANADA's health-care costs in 1989 were 1,683 per head, which looks cheap beside the United States' $2,354 but expensive beside West Germany's $1,282. The Canadian system is paid for by taxes. Each Canadian province operates a public insurance scheme, which then bargains with private fee-for-service doctors. The government schemes thus have near-monopsony clout, which keeps drug prices and some other costs low. But even with Canadians able to pop over the border to the U.S., there are waiting lists. Furthermore, Canada's health figures may be misleading because of the youth of the Canadian population. There is not as much innovation as in the United States. I doubt if Canada's system is the model of the future. [See box p. 33.]

West Germany's health care is financed by a payroll tax on employers and employees. These payroll taxes are then paid to more than one thousand "sickness funds," which bargain with hospitals and fee-for-service doctors and private clinics. These sickness funds play some of the intermediary role of HMOs, although not as competitively as they should. The individual worker has less choice of sickness fund than you would suppose; that is generally determined by his employer. Payments to hospitals are geared to such-and-such a payment per day, with the result that patients stay in hospitals for too long.

Japan clearly has the longest life expectancy for the lowest cost, despite the lack of preventive medicine and the fact that too many Japanese still smoke like chimneys. About two-thirds of Japanese health care is paid by employers, though with the government running schemes for small businesses and retired people. The money is then gathered by sickness funds, which compete on the German model to bargain with lots of hospitals and with and extraordinary number of quite tiny clinics-maybe two rooms attached to a paramedic's house. As in Germany, the sickness funds play some of the intermediary role of HMOS.

The feature of Japan is competition, with less respect for professionals like doctors (also less respect for lawyers). Japan has far more hospital beds per 1,000 population than any other rich country, but generally fewer doctors, and far more paramedics. There is fierce price competition between clinics. The longer-living Japanese have fewer surgical operations than Americans, which suggests that some of the expensive surgery in the West is unnecessary. It was in Japan that I was shown a list alleging that in some Western countries there were far more deaths of children under appendectomies; the lists correlated with the countries where doctors got more money from cutting little bodies open, perhaps when they only had wind. In return for less surgery, the Japanese swallow more medicine than anybody else. Doctors in Japanese clinics make money by selling medicine to patients. There are usually co-payments to be made by patients after typically overlong stays in Japanese hospitals or clinics, but competition keeps these prices low.

Prescription

NONE of the facts in this article is new. What is interesting is that most outside economists are now coming to an international consensus on how to tackle health-care problems-a consensus very different from what is being said by politicians or by people who draw their incomes from health care.

The sensible way to pay for basic health care is still by insurance, which can be private insurance or state insurance. There should be a slight preference for private insurance, because it will seek better packages for particular things. More important, state subsidies should go only far enough to ensure that everybody can get coverage for basic health care.

There should then be competitive intermediaries which are prepaid to provide that basic care. Those intermediaries-whether called HMOs or sickness funds or group practices or family doctors-need to have every incentive to buy more complicated secondary health care from efficient competitive hospitals and specialists at the cheapest available price. My view is that real competition would bring dramatic new patterns in health care: more automated scans, fewer surgical operations, more emphasis on cost effectiveness, more paramedics, new sorts of health institutions and semiprofessionals as the biotechnology and computer revolutions sweep along. In a competitive world I would expect to see advertisements which said things like: "Last year, as our auditors and inspectors show, we produced 5,000 QALYs for each $500 that HMOs spent on us-twenty times the American average."

If the intermediaries were not providing effective treatments for some ailments, private unsubsidized insurance would become popular for those. Competitive HMOs or other intermediaries, eager to attract patients, would then add these to the packages they put on offer. If we do not go down these competitive roads, but trust politicians who say they will throw limitless tax money at limited supply, then our production of health care will turn as inefficient as that steelworks in Omsk. Per dollar spent, it possibly already is.