Operating Under a Global Budget: Perspectives from the United States and Abroad

An Overview

Uwe E. Reinhardt

If one wished to paint with a very broad brush the evolution of health policy in the industrialized world during the past four decades, one might describe it as a gradual but inexorable shift from expenditure-driven financing of health care towards budget-driven delivery of health care.

EXPENDITURE- VERSUS BUDGET-DRIVEN HEALTH SYSTEMS

Under expenditure-driven financing, the providers of health care were allowed to do for patients whatever they saw fit and to send the rest of society a bill at prices that seemed “unreasonable.” Typically, those presented with the bill paid without reservations or, if they had reservations they paid the bill nevertheless because they lacked the countervailing power present in normal markets without a third-party payment system. Naturally, under this open-ended approach the supply side of the health sector became a rich economic frontier that attracted both the genius of private entrepreneurship and its relentless search for mammon. Technological innovation flourished under this approach as the health sector stood an old adage on its head: Instead of necessity being the mother of invention, invention became the mother of necessity. Once a technical innovation was at hand, its application was quickly deemed a “medical necessity” as long as it promised any additional benefits at all to the patient. Benefit-cost ratios played no role in this world, because the denominator (costs) was deemed irrelevant. Indeed, even to consider costs was deemed ethically unacceptable, because that consideration might



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Changing the Health Care System: Models from Here and Abroad Operating Under a Global Budget: Perspectives from the United States and Abroad An Overview Uwe E. Reinhardt If one wished to paint with a very broad brush the evolution of health policy in the industrialized world during the past four decades, one might describe it as a gradual but inexorable shift from expenditure-driven financing of health care towards budget-driven delivery of health care. EXPENDITURE- VERSUS BUDGET-DRIVEN HEALTH SYSTEMS Under expenditure-driven financing, the providers of health care were allowed to do for patients whatever they saw fit and to send the rest of society a bill at prices that seemed “unreasonable.” Typically, those presented with the bill paid without reservations or, if they had reservations they paid the bill nevertheless because they lacked the countervailing power present in normal markets without a third-party payment system. Naturally, under this open-ended approach the supply side of the health sector became a rich economic frontier that attracted both the genius of private entrepreneurship and its relentless search for mammon. Technological innovation flourished under this approach as the health sector stood an old adage on its head: Instead of necessity being the mother of invention, invention became the mother of necessity. Once a technical innovation was at hand, its application was quickly deemed a “medical necessity” as long as it promised any additional benefits at all to the patient. Benefit-cost ratios played no role in this world, because the denominator (costs) was deemed irrelevant. Indeed, even to consider costs was deemed ethically unacceptable, because that consideration might

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Changing the Health Care System: Models from Here and Abroad lead to the rationing of health care, which was deemed unacceptable on its face. Under the second approach, budget-driven health care delivery, society establishes some sort of prospective budget for health care and tells providers to do the best they can with that budget. Typically, the establishment of the overall budget has been rather arbitrary in practice, in the sense that the budget is tied to some arbitrary criterion such as a fixed percentage of the gross national product (GNP) or a fixed annual growth rate. Ideally, of course, this approach should lead the budgeteers to explore what additional benefits might be had by incremental expansions of the budget and to set the ultimate budget limits in that way. In any event, however, the application of new medical technologies in this world will typically be subjected to rigorous cost-benefit analysis before payment for such technologies will be made out of the fixed budget. Merely demonstrating promised benefits is no longer sufficient and will not be accepted by those who would stand to lose from applications of novel technology within the given budget constraints. During the first two decades following World War II, when the industrialized world experienced rapid economic growth, many nations were willing to adopt expenditure-driven financing of health care. That policy was most exuberantly pursued by the former West Germany, whose health spending until 1975 rose faster than that of any other industrialized country. Since the mid-1970s, however, most of the industrialized world has attempted to shift toward budget-driven health care delivery, with varying degrees of success. Some countries, notably England and Sweden, had already adopted top-down budgeting before the mid-1970s. Even the conservative, market-prone government of Helmut Kohl of Germany introduced in December 1992 a new health reform law that provides for strict, global, top-down budgeting of all sectors of the health system effective January 1, 1993. In this respect, the United States remains the odd one out, because it is only just thinking about moving in that direction. For the most part, both the government and private-sector payers in the United States are able to figure out what they have spent on health care in any given year only with a lag of a year or so. In fact, the announcement of total national health spending in recent years has lagged actual spending by close to 2 years. That announcement is eagerly anticipated by all concerned, and the actual numbers always come as a complete surprise (and, typically, as a complete shock as well). In 1993, for example, health spending may well climb to 14 percent of the gross domestic product. A forecast published by the Congressional Budget Office of the U.S. Congress predicted a ratio of 18 percent by the year 2000.

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Changing the Health Care System: Models from Here and Abroad PROSPECT FOR A BUDGET-DRIVEN AMERICAN HEALTH SYSTEM In view of these sobering portents, there seems little doubt that the 1980s was the last decade of the completely open economic health care frontier in the United States. Several recent health reform proposals—including the proposal put forth by President Clinton during his presidential campaign and one put forth by the prestigious American College of Physicians—have called for a global national health care budget. That budget is to be determined by a national board of stakeholders, somewhat akin to Germany's Konzertierte Aktion (Concerted Action), which had set recommended national expenditure targets there for about a decade. But while there is now a rising chorus for budget-driven health care delivery in the United States, such a policy is not easily implemented, because the country still lacks the institutional framework through which global budgets—or global expenditure targets—would be established at the national level and apportioned to regions and individual institutions. Therefore, a good part of the coming year is likely to be spent (1) debating further the philosophical pillars for or against the global budgeting approach and (2) researching the institutional changes needed to make a switch to more explicit budgeting practically feasible. As part of that debate, the United States is likely to look intently at the experience of other nations whose experts will find here a new market for their insights. Philosophical opposition to prospective budgeting for health care usually rests on two pillars: first, that the size of any such budget is arbitrary, and second, that such a budget will engender rationing at the margin. Implied in the first argument is the notion that, until we have a scientifically valid mechanism for setting the percentage of the GNP that should go to health care, it is safer to let doctors and hospitals tell us what we should spend. Alas, honest scientists must confess that we are unlikely to develop soon the requisite objective criteria. Alas, too, it is unrealistic to expect government and the business sector to stand by idly until such criteria are at hand, all the while letting their budgets hemorrhage into the health care sector. Implicit in the second argument is the notion that rationing in health care is evil on its face. In the United States, vehement opposition to rationing is sometimes voiced almost as if the United States had never engaged in the rationing of health care. In fact, we have always rationed care, as have other nations. Only the methods have differed. Broadly speaking, most other nations have tended to withhold a few costly, po-

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Changing the Health Care System: Models from Here and Abroad tentially beneficial medical interventions from all of the people, while the United States has chosen to withhold a very wide range of even highly beneficial medical interventions from some of the people (poor, uninsured individuals) while bestowing every conceivable medical intervention on the rest of society, as long as the intervention 's cost-benefit ratio was ever so slightly above zero. Indeed, there is mounting evidence that many well-insured Americans actually receive interventions that are unnecessary and even harmful. People accustomed to defending our expenditure-driven financing of health care with appeals to the threat of rationing are likely to discover, in the course of the looming debate on health policy, that this argument will lose its power. The word rationing per se is not likely to frighten those in the private and public sectors who yearn for firm, prospective health care budgets. These budgeteers will be moved to added outlays on new technologies only by evidence of high cost-benefit ratios. Furthermore, they are likely to compensate the producers and users of new medical technologies only at prices that imply the full utilization of any associated fixed-capital investments. Managed Competition as an Alternative to Top-Down Budgeting Opponents to global budgeting in the United States offer as an alternative the strategy of managed competition and managed care. Some proponents of that approach market it as the “last hurrah” of the free market, although, in fact, the approach is inherently regulatory in nature. To make it work properly, myriad new government regulations that will force competing managed care systems to compete fairly, without violating ethical standards, must be spelled out. The approach is, therefore, more accurately described as regulated competition. Managed care in the American context means the external monitoring and comanaging of an ongoing doctor-patient relationship, to make certain that the attending physician prescribes only appropriate interventions, where the term appropriate certainly excludes procedures without any proved medical benefit but may also eventually exclude beneficial procedures with a low benefit-cost ratio. Proponents of managed competition and managed care who believe that the approach will not lead to rationing are deluding either themselves or others. There is bound to be rationing of various sorts, but it will be decentralized and subject to checks through consumer preferences at a more local level, at least in principle. Managed competition means a highly structured and highly regulated framework that forces vertically integrated, income-seeking managed care systems—preferably, but not necessarily, capitated systems that

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Changing the Health Care System: Models from Here and Abroad compete for patients on the basis of premiums and quality, where the latter is to be measured by both clinical outcomes and the satisfaction of patients. Central to the strategy is the idea of putting competing managed care systems each into transparent, statistical medico-fishbowls that can be compared both by patients and those who pay for services on behalf of patients—for example, government agencies or businesses that procure health insurance coverage for their employees. Canadians and Europeans still appear to believe that the best way to control overall health spending is to (1) constrain the physical capacity of the health system, (2) control prices, and, for good measure, (3) impose something as close as possible to global monetary budgets on the entire system. Within these constraints, however, they allow doctors and their patients considerable clinical freedom, on the thought that in this way the system will tend to maximize the benefits that are wrung out of the constrained set of real and financial resources. In other words, there is (as yet) considerable trust in the medical establishment's willingness and ability to use the resources made available to it properly, without the need for day-to-day supervision. Direct comanagement of an ongoing patient-doctor relationship on the American model is still rather rare in Canada and Europe. By contrast, the American proponents of managed competition believe —and the proper word is believe—that, by paying for everything that is beneficial, but denying payment for everything else, the nation can avoid setting arbitrary global budgets and will, in the end, devote the “right” percentage of the GNP to health care. These proponents have considerable faith in the ability of ordinary consumers to choose wisely among the alternative cost-quality combinations offered to them by competing managed care systems in the health care market. On the other hand, they have little faith in the ability or willingness of individual physicians to use scarce resources wisely in the treatment of patients and, therefore, would subject each doctor to constant statistical monitoring and hands-on supervision. Although the concept of managed competition has enormous intuitive appeal, its proponents must concede that it is yet a theoretical blueprint without a full-fledged real-life counterpart. Although the nation has been well served for decades by vertically integrated health systems—such as staff or group model health maintenance organizations—none of them has so far competed on the terms foreseen by the strategy. While full implementation of the strategy might obviate the need for top-down global budgeting —which would be a relief, indeed—there is no convincing evidence that it will achieve that end. That circumstance confronts President Clinton with a troublesome political dilemma: Should he set aside global budgeting for now, gam-

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Changing the Health Care System: Models from Here and Abroad bling his first-term health policy on the faith that managed competition will perform as advertised, or should he be cautious and couple a move toward managed competition with a global budget? This question confronts the proponents of the concept with an equally vexing moral dilemma that they ought not to overlook: Can they, in good conscience, persuade the President to take that gamble, to eschew global budgets, at the risk of entering the presidential campaign in 1996 with a visibly broken promise expressly made during the campaign of 1992, namely, that he would bring health care costs under control? In this respect, he clearly has much more to lose than the policy analysts who are marketing the theory. Fortunately, pursuit of managed competition does not erect barriers to the eventual establishment of top-down budgeting later on, even if it were now decided to set aside that powerful instrument for the time being. On the contrary, managed competition based mainly on capitated managed care furnishes the ideal platform for top-down global budgeting. It should be very easy to graft global budgets on a capitated health system, certainly much easier than attempts to impose them on fee-for-service systems. Thus, ironically, while the proponents of managed competition see their concept as the last bulwark against global budgeting, they are actually designing the perfect infrastructure for that policy. Is There a Future for U.S. Health Care? Do the prospects outlined above portend dire straits for the U.S. health sector—particularly for those who call health spending “income”? They do, in the sense that completely open-ended financing of health care is always more comfortable for providers than will be prospective budgets. On the other hand, these prospects merely represent attempts to shift the American health sector more toward the tough, prudent buying that is observed elsewhere in our market economy, or at least toward the principles that are used elsewhere in the industrialized world to allocate resources to the health sector and among the competing uses within that sector. A sensible posture toward these developments would not be to hearken back to the “good old days” of open-ended health care budgets and to frighten the world with hysterical allusions to rationing or other forms of disinformation. A sensible posture will be the one that obeys the following admonition: “Praise the Lord, never stand between a dog and a lamp post, and exploit the inevitable.” In seeking to exploit the inevitable, the providers of care, and the manufacturers of medical equipment who stand behind those providers,

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Changing the Health Care System: Models from Here and Abroad should prepare themselves to demonstrate convincingly the benefit-cost ratios implied by their various offerings—particularly by offerings that are embodied in costly, new medical technologies. They should also get ready, of course, to anticipate the errors that naturally occur in any budget-driven health system and to cooperate with the private- and public-sector budgeteers in attempts to avoid such errors. Defining “Equitable Access” As we explore these issues in the year ahead, it would be helpful if the participants in the debate would articulate very clearly their own particular interpretations of the words equity and rationing. If ration we must and will, should we follow the dictum that if everyone who “needs” it cannot have access to a new, expensive, beneficial procedure, then no one in society should have it? Or should we settle on an alternative definition of “equitable”? For example, we could define the phrase “equitable access to needed health care” in at least three distinct ways, as follows: Socioeconomic egalitarianism. A Martian visitor should never be able to discern a patient's social and economic class by observing the medical treatment he or she receives for a given illness, by observing the process by which that treatment is applied, or by observing the setting in which that treatment is rendered. Medical egalitarianism. The probability of surviving a given medical condition should be the same for all citizens, regardless of their socio-economic status. On the other hand, neither the process by which the requisite medical treatment is delivered nor the setting in which it is delivered needs to be independent of socioeconomic status. (Concretely, for example, it is acceptable to force publicly financed patients into health maintenance organizations with limited panels of doctors and hospitals while permitting the well-to-do to procure with their own funds health insurance policies that grant patients complete free choice of their doctors and hospitals.) Constrained egalitarianism. Every one in society should be guaranteed access to a defined basic package of medical benefits that may not include certain potentially beneficial, high-cost, high-tech treatments (e.g., liver transplants or magnetic resonance imaging scans for routine headaches). Well-to-do persons, however, should be permitted to procure such treatments with their own funds or through privately purchased health insurance policies. This approach would have the well-to-do finance the expensive cutting edge of technical progress and also offer their own bodies for experimental medical science. It is they who would fi-

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Changing the Health Care System: Models from Here and Abroad nance the gradual slide down the medical learning curve until the point is reached at which a new technology can be more widely shared, even with the poor, in future generations. On the other hand, of course, the approach raises issues of fairness among contemporaries. In effect, it might link the probability of surviving a given medical condition to a person's socioeconomic status. Which definition should be the basis of U.S. health policy?