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The business of health reform.

Read any national news or business magazine and you invariably find at least one article dealing with the need to reform our health care system. The primary catalyst for reform is the persistent escalation of health care costs. As evidence, in 1984, the average U.S. employer spent $1,575 a year on health care per employee. By 1991, the figure was $3,605. Moreover, the 1991 figure bought less; it purchased only 75% of the employee's benefits, as compared to 80% in 1984, forcing the employee to pay a larger share of the cost.

The interactive relationships of the health sector of our economy with the interests of American business are highly complex, sometimes contradictory, and usually politicized. As a simple example, it is not unusual to find in the same magazine an article decrying rising health costs plus a section on personal finance extolling the investment potential of either the newest hi-tech medical firm or the double-digit earnings projections of our nation's pharmaceutical companies. Consequently, even as the sense of urgency for health care intensifies, the definition of what constitutes reform becomes more exclusive. Each interest group stakes claim to its own reform agenda and, absent national and state leaders who generate consensus, paralysis prevails.

The article reviews some of the business-oriented dynamics in our system and portrays one vision of health reform that requires sacrifice on the part of all interest groups.

The Corporate Giant Awakens

Several factors contribute to the growing corporate focus on health care. First, as the percent of GNP spent on health care approaches 13%, American business leaders increasingly question the value of the health services they purchase especially since, although health care expenditures now exceed corporate profits, our health status indicators lag behind those of other nations.

For example, our life expectancy ranks 17th in the world. Our national death rate among teenagers rose over the last 10 years. Epidemics such as measles, tuberculosis, and syphilis have returned with shocking intensity while the HIV plague now affects Main Street, U.S.A. Indeed; AIDS has now surpassed heart disease as a killer of young adults. In New York City, it is the leading cause of death of men and women in their thirties. The implication of these issues on corporate taxes, insurance premiums, productivity losses, etc. requires corporate involvement in public health policy decisions.

Second, federal and state governments are using their political leverage to legislate shifting the costs of Medicaid and Medicare from the public purse onto American business.

Third, the Financial Accounting Standards Board Statement No. 106 now requires businesses to reserve the long-term financial expense of retiree health benefits. These expenses stun many corporate executive leaders and awaken them to the growing costs of health care on the balance sheet.

Fourth, employee benefits managers predict that health costs per employee will reach $6,500 in 1985 and $13,000 by the year 2000. National polls indicate that more than 90% of corporate executives want fundamental changes in the health care system.

Fifth, the current prolonged recession has increased the economic pressure on most firms. Many international business sectors are now facing severe economic challenges and are seeking ways to rein in expenses so as to maintain their competitive stance in the global marketplace.

The Dilemma of the Uninsured

The foundation for all health care reform must be the admission that access to a basic level of health service is a right. One of every seven Americans -- 36 million -- has no health insurance coverage at all. Surprisingly, 84% of the uninsured are either employed or the dependents of an employed worker. In New York State, more than two million people are uninsured, thereby creating a financial burden on society, as well as an ethical one. In 1990, New York State hospitals provided more than $1 billion in uncompensated care after adjusting for governmental subsidies. Unfortunately, since the uninsured often defer care until their ailments are advanced, not only do they enter the hospital through the emergency room, they stay in the hospital longer when admitted and have a higher death rate because of their severe conditions. We reap an expensive system and poor health outcomes for this social failure.

Corporate America pays the tab for the uninsured in a variety of ways. Companies that provide insurance pay a subtle surcharge on their health insurance premiums: Either they pay higher hospital charges for their insured employees in unregulated states, or they pay to support public programs which partially subsidize hospitals in regulated states like New York.

Local governments also pay significant subsidies to support municipal health centers and hospitals. For example, in 1988, New York City provided more than $500 million in support of the Health and Hospital Corporation. Pressure continually mounts on state governments to expand Medicaid eligibility levels as the ranks of the uninsured swell with each uptick in the unemployment rate or with termination of insurance by another company. As local and state governments respond, the tax implications on business are obvious.

Models of Every Political Persuasion

In 1988, health care as an issue never reached an audible discussion level in the presidential campaign. In 1992, it became a major point of the presidential and congressional policy debates. Virtually all agree that the current health care system is not working well for a significant portion of Americans. While numerous reform proposals have been advanced, they fall into three broad categories:

1) single-payer national health insurance,

2) a free-market approach to expanding access to health insurance, and

3) enhancing employer-based health insurance coverage.

Single-payer insurance programs, such as Canada's and Great Britain's, control costs and guarantee access by having the government finance care and place a ceiling on provider payments and total spending. The Canadian plan -- with its portability, emphasis on primary care, and universality -- has much to recommend it. However, these benefits must be weighed against the documented waiting lines, extensive limits on new technology, high taxes, and general lack of innovation in the system, A New York State version of the Canadian system, NYHEALTH, passed the State Assembly earlier this year, but was not acted upon by the Senate.

President Bush has indicated support for a free-market approach that would encourage the purchase of private health insurance via vouchers with a tax deduction offset. This approach is supported by the New York State Medical Society. While the plan would expand access, its complicated interplay of tax credits, deductions, and vouchers raises serious questions about its applicability. More importantly, it does not address the fragmentation of our health system. While financially attractive to providers, since it enables more people to pay for their care, there is no real reform in the service delivery system. In addition, health expenditures would likely escalate even faster.

The American Hospital Association and the Hospital Association of New York State (HANYS) believe that building upon our nation's existing system of employment-based coverage is a realistic way of expanding access to care because most of the uninsured already have some connection with the workplace. With reforms in the insurance industry and appropriate tax incentives, health insurance could be made more affordable for employers, particularly small groups.

HANYS' universal insurance proposal, PRO-HEALTH, follows the "pay or play" model. PRO-HEALTH would require employers to provide a specified health benefit package to their employees or pay a payroll tax. The benefit package would include preventive and primary care, hospitalization, emergency medical care, specialized physician services, and outpatient care. Additional benefits could be included if specified and funded by legislation. Small business would require tangible tax credit support during the initial years of the program. The public program would be phased in over a four-year period. However, for health reform to succeed we need a broad, multifaceted approach, of which universal coverage is one, albeit the most essential, component.

Learning From Mistakes

Before reaching for either the free-market or government dominated extremes of the reform choices before us, it would be prudent to briefly reference the lessons of recent experience in two of our largest states -- California and New York.

California embraced the pro-competition model in the early 1980s. Trusting to marketplace forces, California's governmental and business leaders insisted that competition would yield greater hospital efficiency. They felt an emphasis on managed care delivery systems could control costs, improve quality, and expand access by a process of encouraging negotiated rates with providers for care delivery.

Ten years later, the results are quite the opposite of those intended. California's health spending was 21% above the national average during the decade. Its per capita health costs surpassed those of New York, rising to second highest in the nation. The percentage of Californians without health insurance increased substantially and proportionally much faster than the nation as a whole. Many non-public hospitals enacted strategies to gain market share among insured patients while the uninsured have become a greater burden on public and true mission-oriented nonprofit hospitals. The absence of community-based planning only intensifies the acquisition of high technology. The competition to be "the newest with the latest" encouraged service expansion in specialty areas even where redundancy meant under-utilization. According to a recently published analysis by Socolar, Dager and Hiam, "Competition in California has cost lives and money. ...High spending coexists with low rates of coverage -- the state ranks seventh in percentage of people lacking insurance. Hospitals have closed emergency rooms and other unprofitable services while marketing duplicative and often unnecessary services to the well-insured. With real free markets unattainable in health care, California's competitive rhetoric has rationalized growing inequalities and higher costs. The market's invisible hand has picked Californians' pockets and endangered both rich and poor."|1~ On the other side of the spectrum is the New York regulatory experience. In New York, the regulatory model has done an effective job of controlling hospital costs over the last decade; however, that success was purchased at a different price. New York State hospitals now have the second oldest plants and capital equipment in the nation. In terms of overall financial viability, New York State hospitals rank as the weakest in the nation. During the late 1980s, there were several successive years of aggregate, annual operating deficits of more than $1 billion. Cash availability at many urban hospitals is less than that required to meet one week's operating needs. New York State has the lowest full-time equivalent staffing ratios in the nation. While that may be efficient from an accounting standpoint, it may be dangerously low according to comparative deficiency reports on staffing levels by the Joint Commission on Accreditation of Healthcare Organizations.

Building moratoriums, unrealistic capital spending caps, and low Medicaid rates curtailed nursing home and home health expansion in the 1980s. In 1990, the shortage of primary and long-term care services combined with the outbreak of AIDS, tuberculosis, syphilis, and drug abuse to overwhelm the system, resulting in severe overcrowding in hospital corridors and emergency rooms. While State government worked with hospitals to address the crisis, there has been no relaxation of the micromanagement of the system that has destroyed much of the innovation and creativity necessary for constructive change. Unfortunately, repetitive State budget crisis, resulting in Medicaid cutbacks, have combined with the recession and the overwhelming social pathology to create a very precarious hospital system struggling to meet the needs of a highly vulnerable population.

Based upon the California and New York experiences, it is essential that we reject the false allure of the marketplace and the simplistic answer of governmental micromanagement and develop a common vision for future reform that does not seek solution in the extremes.

Health Status As The Target

Our public policy decisions should lead to the design of an innovative public and private health system partnership in New York State that targets improvement in the health status needs of the community and promotes excellence in the efficient delivery of patient care through health promotion, clinical services, disease prevention, research, and advocacy of quality of life. In any reform, patient and community health care needs must be the central focus of all decisions. Incentives should be fashioned to keep individual patients as healthy as possible and to improve the community's health status.

Cost Containment -- Sine Qua Non

Any reform plan will fail, no matter how attractive the universal insurance component, without explicit cost-containment protection for society. Under HANYS' Universal Insurance Plan, PRO-HEALTH, rate-setting would be governed by an independent Health Services Commission, whose members would be appointed by both the Executive and Legislative branches. Patterned after models that exist in Maryland and other states, oversight of payment rates can be continued in a regulated framework based on an objective analysis of what constitutes adequate payment to meet fair and reasonable costs.

However, effective cost containment should emerge from the more efficient design of local health care delivery systems. Cost containment will be most effective when it is internal, not external, to the delivery system. Once the health care needs of a given community are identified, insurers and providers should be offered incentives to organize networks to meet those needs. Whether one terms these networks horizontally or vertically integrated, whether they are considered preferred provider or health maintenance organizations, community care networks or something else -- the form and sponsorship of the network is less important than the basic premise. As the Governor's Health Care Advisory Board in New York State has stated, "We need now to organize the health care system around a new model of caregiving. Now care must be more available, more reflective of the individuals in each community. It is time to bring health care back to where people live. The continuum of health services in each community is the basis for a new model."|2~

Every community care network would offer a seamless health care system from preventive care to long-term care, so patients would no longer face the currently fragmented multitude of unconnected providers and lack of primary care availability. Government, business and individuals would contract with community care networks to provide care for enrollees. Hospitals, physician groups, and private insurers could own or co-own and operate networks. To the extent that financial incentives for all participants are aligned, there is an inherent major cost containment initiative in the delivery system. As an American Hospital Association document stated recently, "Competing incentives have led to a system that is costly and fragmented. Physicians are paid of each service rendered, giving them an incentive to provide more services. Hospitals are often paid a fixed amount per patient for each admission.... There is no incentive to keep people out of the hospital in the first place. Responsible and effective cost containment begins by restructuring the health care delivery and financing systems to realign incentives and encourage the efficient use of resources by everyone."|3~ Community care networks will stimulate greater efficiency in health delivery. Excess capacity and duplication of services will be eliminated. Initially, the Health Services Commission will establish fair rates of payment for the networks. Once the entire population is insured, a more competitive, negotiated rate environment could be re-evaluated. The Commission could also consider global budgets for networks or entire regions or it could authorize capitation approaches where the networks are willing to participate in such experiments.

Regulatory Reform

Significant cost containment can come from the innovation and creativity of decision-makers responding to positive incentives. Today, the micromanagement of the New York State health system is so intense that much of our senior management thinks and behaves within the narrow mindset of "being in compliance." Punitive "or else" lessons have led to a "compliant" universe rather than a dynamic one. While providers must be held accountable for the quality of care they provide, this needs to be accomplished by establishing what outcomes are desired, measuring the results, and taking appropriate action, not by micromanagement.

The Business Council of New York State describes the situation as follows, "Thus, at a time when health-care costs are mushrooming and all sectors of New York's economy are taking some heavy hits, state health planning officials continue to pump out new regulations governing hospitals and nursing homes at an average of 60 per month - over 700 a year. ...Often the rules pursue what seem to be worthy and reasonable goals. The objection is the rigid language detailing just how they are to be accomplished - language that allows virtually no flexibility for size of the facility or circumstances. ...The question inevitably arises, how much regulation is absolutely necessary and how much can we afford?"|4~

Quality Enhancement

One of the key objectives of reform is to maximize value for every dollar spent on health care. Our reform vision needs to build a commitment to continuous improvement in quality. This year, HANYS brought one model of continuous performance improvement to its membership by stressing integrated, multidisciplinary, and collaborative approaches to examining the entire patient care experience. The New York State Department of Health is now funding a demonstration of the model's implementation in the Capital Region.

Another key to improving quality is support for more sophisticated quality management systems. Within New York State, several corporations such as Xerox and Corning Glass have worked closely with hospitals to share their techniques, educators, and experiences in total quality management with the health community. These joint initiatives need to be encouraged and supported by trade associations and health coalitions.

All patients and community members have the right to select individual health care providers and to make informed choices about their health. In order for consumers to engage in this decision-making process, they must have access to timely and accurate information about the consequences of their own actions, as well as the capabilities of their physicians and hospitals. The release of information and data to assist consumers in making wise choices about health care services is supported by the New York State health community. Research findings are an important tool that can be used by consumers, but appropriate translations of the data must accompany the use of such information.


Now that the health care crisis has caught the attention of the media and the politicians, the possibility for meaningful reform arises. While state and national debates are currently trapped in political posturing, eventually a compromise between the free-market and the government-centrists should emerge. Improvement in the health status of the community must be the ultimate goal behind the public policy decisions that are made. Collaboration and networking should replace competition and micromanagement. The health needs of the public, not the fiscal demands of providers and payers, should predominate.

Cost containment must be explicitly addressed through a state and/or national Health Services Commission to determine an overall level of financial commitment to meeting our health needs. A universal insurance foundation is the essential underpinning of reform, with an employment-based system offering the most practical approach.

Community health networks, providing a range of needed health services from primary and preventive to acute and long-term care, should be developed. Financial incentives among providers in these networks will need to be aligned to stimulate efficiency in the delivery system.

A new social contract between providers, payers and the public can be achieved and replace the purely marketplace-driven economic imperatives that fragment our care and escalate our costs.

The public welfare and the public purse can be protected at the same time that a dynamic and innovative provider community is maintained by a series of supportive reforms relating to health and medical malpractice insurance, regulatory micromanagement, and broader access to the outcome performance of providers.

Daniel Sisto is President of the Hospital Association of New York State, Albany, New York.


1. Socolar, D., A. Sager and P. Hiam, "Competing to Death: California's High Risk System," Journal of American Health Policy, March 1992, p. 45.

2. "Health Care Reform for the State of New York," Governor Cuomo's Health Care Advisory Board, Interim Report--1991, p. 28.

3. "National Health Care Reform," The American Hospital Association, Chicago, Ill., May 1991, p. 1.

4. "Why Health Care Costs So Much," The Public Policy Institute of New York State, Inc., May 1991, p. 28-29.
COPYRIGHT 1992 St. John's University, College of Business Administration
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Title Annotation:Symposium: Health Care
Author:Sisto, Daniel
Publication:Review of Business
Date:Dec 22, 1992
Previous Article:Can health insurance costs be controlled?
Next Article:Corporate retiree health benefits threatened by financial pressures.

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