Additional Perspectives on Global Budgeting

PHYSICIAN PERSPECTIVE

Robert Blendon

My task is to present a study that looks at the issue of global budgets from the perspective of practicing physicians in western Germany, Canada, and the United States. The research was supported by five organizations, including three foundations: Commonwealth, Robert Wood Johnson, and Pew.1

The study attempted to address three simple questions: (1) How satisfied are practicing doctors in the three countries? (2) How satisfied are they with the medical practices in their countries? (3) What are the realities of the patient care decisions in the three countries?

I will briefly summarize four results of the study as they apply to the question of global budgets and then I will discuss their implications. First, the two countries that have both universal coverage and global budgets, Canada and Germany, have physicians who are more satisfied with their health care system than American physicians are with theirs. Physicians in western Germany are the most satisfied, Canadians are in between, and U.S. physicians are the least satisfied with the current arrangement.

The second result is a caveat. Our study found that there is no medical care Camelot. That is, across all three countries, one-half or more of physicians wanted fundamental change of the system they were in.



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Changing the Health Care System: Models from Here and Abroad Additional Perspectives on Global Budgeting PHYSICIAN PERSPECTIVE Robert Blendon My task is to present a study that looks at the issue of global budgets from the perspective of practicing physicians in western Germany, Canada, and the United States. The research was supported by five organizations, including three foundations: Commonwealth, Robert Wood Johnson, and Pew.1 The study attempted to address three simple questions: (1) How satisfied are practicing doctors in the three countries? (2) How satisfied are they with the medical practices in their countries? (3) What are the realities of the patient care decisions in the three countries? I will briefly summarize four results of the study as they apply to the question of global budgets and then I will discuss their implications. First, the two countries that have both universal coverage and global budgets, Canada and Germany, have physicians who are more satisfied with their health care system than American physicians are with theirs. Physicians in western Germany are the most satisfied, Canadians are in between, and U.S. physicians are the least satisfied with the current arrangement. The second result is a caveat. Our study found that there is no medical care Camelot. That is, across all three countries, one-half or more of physicians wanted fundamental change of the system they were in.

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Changing the Health Care System: Models from Here and Abroad Third, the study shows that with global budgets, some things that are important to practicing physicians disappear. We have no outcomes research in our study, but physicians in Germany and Canada wish that certain things that money could buy were more available. I will give you two examples of this third finding. In Canada, the problem is access to adequately equipped medical facilities and specialists. Physicians were given a series of measures of practice and asked if they had any serious problem in this area. In Canada, 50 percent of practicing physicians said they had a serious problem getting access to adequately equipped medical facilities for their patients. That number was 14 percent for U.S. physicians. In Germany, the problem that was most striking had to do with quality of care in inpatient facilities. Physicians were asked to rate the competency and quality of the hospital nursing staff where they most often worked. In the United States, 80 percent of practicing physicians rated the quality of their nursing staff highly. In western Germany, only 30 percent did so. In short, problems differ from country to country. Finding number four: We also found a positive side to the problems in Germany and Canada cited in our third finding. Physicians in Germany and Canada have no problems with patients who do not have the ability to pay. When asked whether they had a serious problem with patients who cannot pay for needed care, 73 percent of practicing doctors in the United States said yes. In Germany, only 15 percent said yes; in Canada, 25 percent said yes. I draw two conclusions from these data. First, universal coverage and global budgets involve some trade-offs. To be honest, the level of expenditures is still so much higher in the United States that we could probably lower our expenditures and see none of the problems that we found in our study for a number of years. But somewhere down the line, there will be a trade-off involving services not being made available to physicians. Second, the fact that Canadian and German physicians express greater satisfaction, even in the face of trade-offs, than their American counterparts indicates that universal coverage is an advantage for those physicians. They do not have to make the sorts of political decisions that come with patients who cannot pay for care. In summary, it is important that from the perspective of physicians, global budgets involve trade-offs. There are areas of patient decision-making that physicians feel are appropriate and that they are unable to achieve within the present U.S. system. I think the debate will be around how important U.S. physicians think the trade-off is between the things physicians in other systems think they

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Changing the Health Care System: Models from Here and Abroad are giving up and the benefit they derive from never having to see uninsured patients. Reference 1. Blendon, R.J., K. Donelan, R. Leitman, et al. 1993. Physicians' perspectives on caring for patients in the United States, Canada, and West Germany. New England Journal of Medicine 328(14):1011–1016. CANADIAN EXPERIENCE W. Vickery Stoughton First, I would like to put health care in Canada in historical perspective. In the late 1960s the Canadian health care system, for all practical purposes, paralleled the U.S. health care system of today. In 1970, global budgeting was introduced in Canada. The basis of that introduction was taking the 1969 budget and capping it for every institutional care provider in the country, with some increase for inflation in 1970. Then, from year to year, the government would deal with each institutional provider on the basis of that global budget, with some adjustment based on inflationary considerations and approved program changes. Before 1969, Canada and the United States were spending roughly equivalent shares of their gross domestic products and gross national products on health care, and probably roughly the same amount on a percapita basis as well. Since then, however, the Canadian system has actually held its cost increases down more tightly. That effort is reflected in the current numbers, which demonstrate that on a per-capita basis, U.S. expenditures exceed Canadian expenditures by about 40 percent. How has that occurred? Here Uwe Reinhardt is right—it has not occurred specifically in areas that are reimbursed on the basis of volume. When examining cost increases from one year to the next in those areas that are reimbursed on the basis of volume, one can see swings in costs that are equivalent to, if not even higher than, some in the United States. Pharmaceutical products, for all practical purposes, are reimbursed on the basis of volume, and the cost increases in the late 1980s were in excess of 20 percent a year. Physician fees are also reimbursed on the basis of volume. Although there was an effort to control the magnitude of the fee by specialty, the fact that it was volume-related allowed the number of patients treated by specialists to increase. Those overall cost increases exceeded 16 percent a year. In the institutional global budgeting area, however, cost increases were more in the neighborhood of 10 to 12 percent a year. Those institutional cost increases—be they for acute care hospitals, nursing homes,

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Changing the Health Care System: Models from Here and Abroad community-based programs, or services that function under an institutional budget—were kept down to a lower level simply because of the impact of the global budgets. Institutional global budgets generally represented 46 to 52 percent of the health care expenditure in any Canadian province; therefore, Canada was able to keep its cost increases down. Where Canada had the exposure was on volume-related services. The Canadian government will revisit those areas because they see those cost increases going up disproportionately compared with those in the rest of the system. This again includes professional fees, drugs, and other kinds of activities and services remimbursed on the basis of volume. Global budgeting creates other problems, however. Systems with global budgeting have created waiting times. There is no question that these waiting times have affected professional perceptions of the system and the system itself in terms of getting patients timely access to the right technology. Waiting times have also had an impact on specific patients, and these effects have not been positive by any means. When global budgeting was introduced in 1970, however, there were no waiting times. Canadians were not sold this system on the basis of whether there were going to be waiting times. They accepted the change because the system would create access to health care for everyone, irrespective of their financial means. The system has done and continues to do that. By 1983, a study in the province of Ontario demonstrated that waiting times had increased to 5 weeks for routine elective surgical procedures. Fundamentally, in the Canadian system, one can get instant access for emergency procedures and almost instant access for urgent procedures and for primary care services. There is not a long wait for access to a community-based physician. There is a wait, however, for elective surgical procedures or semielective diagnostic procedures. Those waits have gradually crept into the system because of cost-control efforts. By 1989, a study done in the province of British Columbia showed that waits for routine elective surgical procedure had increased to 19 weeks, on average. So, over a 20-year period, there has been a gradual change in the nautre of access. Is that relevant? Of course it is. As the United States looks at mechanisms of introducing cost controls, there is no question that if it moves to a global budget situation, be it for institutional care or for all other forms of care, while initially there may be enough resources in the system to avoid the kinds of issues I discussed above, over time, with the changing capabilities within medicine, with the way the system will be managed and structured, waiting times will result. Health care providers should be aware of that and should decide whether they are going to accept it. On the other hand, there has been no demonstrated way of control-

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Changing the Health Care System: Models from Here and Abroad ling costs without some trade-offs. We must judge what we want as a society in terms of those trade-offs. If, in fact, affordable health care is to be made available to everybody, expenditures must be increased or the existing quantities of money spent on health care must be reallocated. Those are the choices. Reallocation means that more money for health care goes to those people who do not have it, and less to some other parts of the delivery system to pay for it. Where are the trade-offs? In Canada, during the 1970s, particularly in the institutional care setting, as new medical technologies arose, those technologies were only introduced into the system in selected institutions that were controlled from a global budget point of view. Take lithotripsy in the United States in the 1980s, for example. Just about every hospital in the United States has a lithotriptor. They have them so they can be all-service providers and compete with other hospitals. When I was at Duke University a year and a half ago, the lithotriptor was used probably half a day a week. A lithotriptor is a $2 million piece of technology. But Duke had an all-service capability. It could teach its students to use lithotriptors and it was competing in the marketplace. One can think of numerous examples in various cities where every institution has some kind of technology just to be competitive. When a new technology is introduced in a global-budget-controlled system, there is usually a partnership between the payer, whoever the payer is, and the providers in terms of a more studied approach to the introduction of the technology. When the partnership works perfectly, the following will happen. Take lithotripsy as a case in point. A panel will be set up. The panel will be appointed by the appropriate authority and will have expertise in epidemiology, urology, and reimbursement and will have individuals from provider organizations. The panel will be asked to study the incidence of kidney stone disease in a population. The panel will determine the volume of that disease in a given population group (e.g., in the province of Ontario, which has 9 million people) and will then recommend how many lithotriptors are needed on the basis of running that technology 6 1/2 days a week. That is a straightforward process. In Ontario, such a panel made a recommendation to the provincial government that two and a half lithotriptors were required and also recommended where—that is in what population centers—they ought to be located. Then, the resulting competition was between the institutions in those population centers in terms of where those devices would be situated. Once that technology was added, that was the end of the issue on lithotriptors. Does that make professional providers happy? No. Does it

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Changing the Health Care System: Models from Here and Abroad meet the public's needs? Yes. Is there any evidence now that Canadians in the province of Ontario are suffering because of lack of access to current technology related to kidney stone disease? No. There are other examples that are more reflective of the kind of evidence that Robert Blendon presented in terms of lack of access to certain types of diagnostic technologies. If one takes a delay in access to computed axial tomography (CAT) scanners and imaging technology, for example, the frustration level of providers in waiting for needed information related to suspected disease processes is burdensome on the providers as well as on their patients. There is no concrete evidence one way or another, however, that these waits have had a materially negative effect on the overall health status of Canadians. Yet, there is a lot of anecdotal evidence that they have had a negative effect. So it is no wonder that there is a significant level of dissatisfaction on the part of providers, because they feel that they are not doing the best that they can in their desired time frame for the people they are trying to serve. This is a problem. On the other hand, if Canada put 40 percent more into what it expends on health care, these issues would disappear. So, again, we get back to the issue of choices. How much do you feel you can spend? Under what rules and regulations are you going to spend it? Is your first premise that you are going to make sure everybody can afford whatever is available? If that is the case, then how do you divide up the resources to make that work within acceptable spending levels? Would I argue that global budgeting is good and that it works? It certainly did work in Canada. Robert Blendon presented evidence that the Canadian public is steadfast in its support of the Canadian health care system. Ironically, the numbers that he presented, which are presumably recent, are down from where they were even 3 years ago. Three years ago, public support was probably close to 80 percent, as opposed to 50 to 60 percent, at least in some studies that were done on an annual basis in the province of Ontario. So what we are seeing is a growing dissatisfaction. Where does all of this end up? There is no question that governments in every country are going to continue to look for mechanisms to control costs. There is no question that governments that are providers or payers are going to be held accountable by the public for the performance of the system. That occurs in each country that has a form of a national health care system and it is reflected often in periodic elections and in the outcome of those elections. The closer you get to controlling the system, the more vulnerable you become to the political process surrounding health care as perceived by the public. That is another lesson from Canada.

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Changing the Health Care System: Models from Here and Abroad Once you take the responsibility, the issue then becomes spending. How much are you going to spend on A versus B, and how much tolerance is the public going to have on waiting times? Of course, all of that remains to be seen. The next step for a country like Canada is to move in the area of managing care—practice standards and adherence to those standards. Canada will use managed care to promote quality and as a further cost-control mechanism. My own bias, however, is that if costs are truly going to be controlled, just doing it on a managed care, practice standards basis is not going to solve the problem at a level of affordability that is going to be tolerable to Canadians. ROCHESTER, NEW YORK, EXPERIENCE Paul F. Griner For much of the decade of the 1980s, the hospitals in Rochester, New York, were reimbursed under a global payment system. What we learned from that experiment is very germane to the theme of health care reform. So, I will share with you four areas of interest: first, the infrastructure on which the global payment experiment was grafted; second, the experiment itself; third, some assessment of the strengths and weaknesses of the experiment; and finally, some thoughts on what would be required for a successful global payment system for the 1990s. Rochester's Health Care Infrastructure It is important that we understand the foundation on which Rochester 's experiment was grafted. Some have said that the unique circumstances in Rochester preclude the success of the experiment elsewhere. Quite the contrary is true. If we are to marry predictability of expenditures by the payer to access to cost-contained services of good quality by the provider, the characteristics of the Rochester setting are keys to sound health policy. Very briefly, they include the following: Management of system capacity through local planning. Cooperation and innovation among providers. Community-rated health insurance supported by a dominant payer (Blue Cross). Well-organized community services supporting alternatives to hospitalization. High penetration of managed care. Discriminating use of health resources by providers, a reflection of

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Changing the Health Care System: Models from Here and Abroad both capacity management as well as the community-wide influence of the University of Rochester Medical School. Every one of these factors can be introduced elsewhere. In Rochester, they have resulted in fewer uninsured people than elsewhere in the United States generally (6 percent versus 14 percent), lower health care costs (in 1991, $2,378 per employee versus the national average of $3,575), and indicators of quality of care that suggest that it is at least as good, if not better, than that for the country at large. An important caveat is that the success of a global health care budget is dependent upon a provider infrastructure that promotes access, quality, and affordability. The Hospital Experimental Payment Program In 1980, the seven Rochester hospitals and one outlying hospital accepted an individual and regional cap on hospital income derived from all contractors, principally Blue Cross, Medicare, and Medicaid. It is important to reiterate the principles on which this experiment were based: Hospital cost containment is accomplished most effectively through incentives in the payment system as opposed to external sanctions. Hospitals should be paid for the output they produce rather than the input they experience in the production of that outcome. Hospitals should be held accountable for costs they can control, but not for those that they cannot. Individual hospitals should be able to project revenues in advance. An allowable cost base was computed from actual costs prior to the implementation of the experiment. Annual increments were based upon a mixture of local and state wage trends. A contingency fund was established to cover projects approved through the certificate-of-need process. Generous outpatient payments were included to discourage unnecessary hospital stays. Hospitals that were able to realize a surplus after expenses retained such surpluses, an incentive for efficiency. All hospitals agreed to participate in a community-wide clinical and administrative data base, an initiative that has been invaluable for planning and for the assessment of quality. This payment experiment lasted 8 years. During the last 3 years, the community-wide revenue cap was extended to capital costs. In addition, a level playing field was created for some costs such as medical education and uncompensated care. The experiment ended in 1988 when the Health Care Financing Administration terminated our Medicare waiver and the state of New York

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Changing the Health Care System: Models from Here and Abroad moved to an all-payer diagnosis-related-group system. Some feel that we threw the baby out with the bathwater when the global payment experiment ended. Strengths and Weaknesses of the Rochester Experiment What were the successes of the Rochester experiment? By design, it moderated expenditures for health care by the payers. From 1980 through 1990, the rate of increase in family health care costs in Rochester was less than half the U.S. average. Increases in hospital costs were less than the state and national averages, and from 1978 to 1990, the hospital component of the community's health care costs shrank from 55 percent to 38 percent. Despite that, the financial position of the Rochester hospitals improved in contrast to the financial positions of the rest of the hospitals in New York State. Hospital administrators concentrated on managing instead of worrying about market share. Capital growth was contained. A premium was placed on identifying alternatives to hospitalization and on the efficiency of services provided to those requiring hospital care. And, finally, physicians were freed from intrusive utilization review by the payers. After all, the payers had achieved their goal of expenditure control. Utilization management became an issue internal to medicine. What were the payment experiment's weaknesses? Perhaps the most significant weakness was that it did not provide incentives for physicians to seek effective alternatives to costly procedures and hospitalizations. Global budgeting for hospitals and fee for service for physicians represent payment asynchrony. Other weaknesses were that the contingency fund was not sufficient to protect the hospitals from costs that they could not control and that the capital fund fell short of the community's need for technology and new services. Building on the Rochester Experiment The bottom line, however, was that the Rochester experiment was a success, and the weaknesses I mentioned point the way to building on the basic model. The next step in an all-payer global reimbursement system should incorporate physician and hospital services in such a way that the full range of patient care needs, from primary through tertiary care, is ensured. This can be achieved through integrated health care delivery systems of the kind that are developing throughout the country. We need to remind ourselves, however, that control of expenditures by the payer must be accompanied by initiatives to dampen cost inflation:

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Changing the Health Care System: Models from Here and Abroad management of capacity (including the number and mix of physicians), reduction in both physician and consumer demand through such measures as better knowledge of outcomes with which to develop more explicit criteria of optimal practice, and increased involvement of patients in the making of medical decisions. Without this combination of payer expenditure control and health system cost control, we will inevitably reproduce the rationing problems experienced by the other developed countries. If it is not already clear, the Rochester experiment is basically a prototype of model 3 described initially by Uwe Reinhardt (see page —), that is, a balance of top-down global payment control by the payer and bottom-up utilization management and managed care initiatives by the providers. HOSPITAL PERSPECTIVE James Bentley I would like to offer five observations from the hospital perspective. The first is, what do we mean by global budgeting? It seems to be a term that has either many meanings or no meaning. What services are included in the budget? Are they health services, biomedical and behavioral research, personnel development and training, the lost productivity resulting from illness, or all of the above? What funds are included in the budget? Public spending, tax-advantaged private spending, only employer spending, or after-tax personal spending? As I look at it, the discussion about global budgeting needs a little truth in advertising. Public expenditures on health services are already set in ways that permit global budgets, as evidenced by the U.S. Department of Veterans Affairs, the U.S. Department of Defense, the U.S. Public Health Service, the Medicare program, and most Medicaid programs. Public tax benefits are also set in ways that permit global budgets or targets. What we are really looking at is the question, “What is the role of government in determining health spending in the private sector?” That is the question on which most of the debate is focused. Hospitals worry about finding themselves placed in the role of the bad guy when public disappointment is expressed about a debate that has not been openly and honestly named. Hospitals do not want to face the conflict of a public that expects everything and a global budget that has been used to hide the hard choices and limits that a society has made. We believe we should clearly acknowledge that global budgeting is about limiting public-sector spending or tax-favored transactions. It may

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Changing the Health Care System: Models from Here and Abroad also be about public-sector decisions concerning how much of the private resources in the private sector individuals can spend. Second, most of what I have read seems to presume that a global budget is the starting point rather than the outcome of a series of decisions. From the hospital point of view, it does not seem particularly relevant to start with the gross national product and select some arbitrary percentage for use in a top-down allocation. There, the primary decisions are simply how to divide funds. The American Hospital Association believes that we need to start with clear public decisions about (1) what basic benefits are to be included and (2) the timetable for expanding coverage to the uninsured and the underinsured. We need an open, public process that allows the fellow members of our society to understand what is being decided with them or for them, so that they can share in and support the impact of that global budget as it evolves over time. Third, we believe that the nation currently lacks the integration of providers, consistency of payment incentives, and data systems necessary to implement a global budget. In the current fragmented delivery system, there is no organized, integrated means—there is no infrastructure if you will—for providers to effectively allocate resources. We lack the delivery organizations to implement either a top-down or a bottom-up global budget in most communities. Absent an effective implementation structure, we are worried about what will happen to the health care of the community. There also is no shared financial interest across most providers. Individual providers' financial interests are not consistent with overall global budget interest. Absent a shared financial interest, we may well see one or another provider community (or subsets of those communities) undermine the global budget by believing that it should pursue its own individual best interest, even though it undermines the community's interest. Finally, in the current fragmented system there are no adequate or timely data to measure how much we are spending. Dr. Reinhardt indicated that some of our best data “lag reality by 2 years.” Use of data with a 2-year lag to impose penalties or limits or to further affect the supply of resources will create a serious political problem not only for providers but for those we seek to serve as well. The bottom line is not to say that one therefore should not talk about global budgets; rather, for a global budget to succeed, we need to emphasize a delivery system that puts in place the structure, the information, and the shared financial interests. Those delivery system reforms are common to both global budgeting and managed care. Fourth, we are sincerely worried—although no one may believe us—that the current emphasis on global budgeting and its agenda of cost

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Changing the Health Care System: Models from Here and Abroad above the HIPC's lowest price, then you can bring in private dollars. Third, as I travel and listen to people, the least acceptable alternative seems to be that government determines the price. What I find—wherever I go, right or wrong—is a strong perception among the public that if the government gets its hands on pricing, they will mess it up, and there is a perception that somehow government thinks all the money belongs to it. Any number of you who have been traveling have seen the Clinton tax form: How much did you make? How much was withheld? Send the balance in. That is more than just a cynical comment. It reflects a view or worry about the government. And it may be that we have to create a quasi-private entity to be able to do some things in this country that others can do with a federal or state government. REINHARDT: I think if we now legislated fee-for-service, all providers who use it would use the Medicare diagnosis-related groups (DRGs) and the Medicare RBRVS. I think the hit on some of them would be very severe. But you could pass a law, which I would recommend, that everyone must use the relative value scale implicit in the DRG and the relative value scale that was developed for physicians. They may accept their own conversion factor, but they must announce it. Such an announcement could be placed in a local newspaper, so that everyone knows every doctor's and hospital's conversion factors. For once, you would actually have prices. Had traditional competition done this, maybe we would not be in the fix we are in. Maybe we ought to try that at least as a transition toward more uniform fee-for-service schedules to the extent that we wish them to survive, because, right now, I would like to challenge economists to tell me the prices of physicians in their communities. They could not do it. One would have to price 7,000 distinct items. The approach I propose will provide one number. All it would say is, “Dr. Jones and Dr. Rodriquez, here is the conversion factor.” Put it in a local newspaper right next to the yield curve, where people look, and maybe we could have what economists were dreaming about. I am astounded that no economist ever worried about how, in a competitive strategy, prices were supposed to be disseminated. QUESTION: Dr. Griner, could you develop the point you hinted at about the baby going out with the bathwater when New York ended the global payment experiment? Second, how would you take those lessons learned at Rochester and implement them in a national approach to the problem? GRINER: I speak now from the perspective of the hospital, since the physicians were not included in the global budget. The hospital industry

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Changing the Health Care System: Models from Here and Abroad in Rochester went suddenly from a prospective, budgeted, guaranteed payment system to, overnight, on one day in January 1988, a system based on volume and case mix in which our entire financial health was determined by the number of patients we could bring into the hospital. Instantly, the focus of management moved from managing institutions to finding market share. This has not been a big problem in Rochester because we do not have excess capacity; our hospitals run at 85 to 90 percent occupancy. You can see how that could occur throughout the country, however, where hospitals are currently averaging 65 percent occupancy. For us—in my opinion and speaking both as a physician and as a hospital administrator—it has been a very schizophrenic conversion, and one in which we have a set of financially stronger hospitals. But we are doing things that we do not need to do. We have no incentives for looking creatively at alternatives to hospitalization. That is why many of us feel that the DRG system is only the first step in a more rational approach. It certainly focuses on the need for efficiency for those patients who are in the hospital. The next step is to identify patients who do not need to be in the hospital and to create reasonable alternatives to their care through payment incentives that discourage profligate use of hospital facilities. The only way to do that is to reverse the payment system and make sure that hospitals and their medical staffs become partners in risk-reward relationships that put a premium on the discriminating use of resources. To do this, we must talk about global budgeting at the national level. To do it in a local environment, we must break down the actual management of a global budget for a totality of health care services that would include long-term care, community-based services, hospital physicians, and physician's offices. We must break it down into the smallest unit possible that is consistent with the size of the population and the geography. QUESTION: Assuming that we move toward something like a global budget—let us say we had the legislation in 1 year—and the law basically said “do it anyway you can.” How long might it take before managed competition could really take hold? Would it take a long time? In the meantime, would you put in rate regulation to tide you over until you got there? BENTLEY: I am not sure what you mean when you say “a global budget.” If you mean that there would be a hospital budget that would be separate from the physician budget and that both would be separate from the nursing home budget, then I am not convinced that you would

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Changing the Health Care System: Models from Here and Abroad ever get to an integrated delivery system. To make any of the changes Dr. Griner just described with separate categories, you must always persuade somebody to take money out of his or her pocket and give it to somebody else. One of the things that we must do, if we are going to look at any kind of global budgeting that stimulates delivery system reform, is to aggregate that global budget, budget target, or expenditure limit at a much higher, more capitated level. That way, physicians, hospitals, and others could get together and make decisions about how to most effectively provide care and how to address issues of capacity or duplicate resources. There are some limited examples of how rapidly that can happen. Once the money is all together, people seem to be very effective about finding ways to get at it. But when the money is divided, the fact that your money is not my money seems to be an enormous constraint. It is not simply a question of just global budgets. The form of the limit is also important. BLENDON: There seems to be a practicality issue here. We jumped from managed competition to Kaiser. Look at the current data. Fifteen percent of Americans are enrolled in a health maintenance organization (HMO). In 10 states, less than 5 percent of the population is enrolled in an HMO. Half of the 15 percent, 7.5 percent of Americans, are enrolled in something that is similar to Kaiser. Now assume that President-elect Clinton has managed competition and global budgets 8 hours after his inauguration. The loosely organized managed care plans, according to the Congressional Budget Office 's analysis of the data, save, at best, a small amount of money and, at worst, almost none. Studies by my colleague Joe Newhouse suggest that there is a one-time small savings and then the growth is relatively small. So, let's be honest. You have now just told middle-class people that their insurance is going to go over to a group. There will be bids between delivery systems that do not exist, and we will do this within 24 months. The option is to do something based on regulation. You gradually grow yourself into a competitive managed care system over a decade. But I think that is highly unrealistic. REINHARDT: It is really tragic that the Clinton Administration seems to be hanging its reputation on success in cost containment for the whole system. The president-elect did not create the problem, and most of us think that it will take much longer than his first term to achieve a visible victory on that line. If I could give him advice, I would say, cost shift like heck—the more, the better. And there are intellectual and strategic reasons why one would support this. On the intellectual side, I believe that health spend-

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Changing the Health Care System: Models from Here and Abroad ing does the greatest harm in the public budget, where it really does displace education and other wonderful things. No one knows what health spending actually displaces in the private sector. Therefore, the imperative is not as big. Second, unless the business community is truly desperate, so desperate that its arrogance will melt away, it will in fact ask the government to manage health care costs. The Chairman of Ford Motor Company, for example, humbled himself before the nation to say that he cannot manage health care costs and asked the government to help solve the problem. Every time something goes wrong, business blames the government for it, so I would say wait until they are so desperate that they come on their knees and then have them sign a waiver. We are not there yet. I imagine that the advice to do global budgeting did not come from people in business; it came from other people who say you must, above all, Mr. President, get health care costs under control. That is bad advice, because, as most of us will agree, budgets are a nice idea, but at the moment the infrastructure for this does not exist. As for managed care, there is a matter of morals. Can the managed care and managed competition people really ask the President to gamble on their approach when that might cost him his reputation in 1995? Again, it might work and it might not work, but it is a big gamble. I think the President should really say, “I'm controlling the public budget and that's what I can do. As for the private sector, we can talk about it, but first of all, get off your high horse.” But business is still on it. That is the problem. STOUGHTON: I would add only one thing. As global budgets are introduced, whatever entity they are introduced around, those entities—let us pick on hospitals for a minute—are going to respond in the context of the system in which they operate. If, in fact, they must still capture charges or present some kind of payment mechanism, I do not know where the money that globalizes this is going to come from. Unless, for example, the insurance industry is reformed at the same time and control is placed over whether hospitals can compete with technology, it does not work. You cannot just globalize something without taking some additional specific steps. At least, that is my opinion. If one looks at fundamental reform, one cannot talk about managed competition or globalization outside of additional steps that influence the nature of the system in which we are operating. QUESTION: I guess I disagree with Dr. Reinhardt, which I do not do very often. I think that the general sense is that while the change that is needed will not take place immediately, it does need a number of years to work out. So the criticism that within 8 hours we are going to have this is really not valid.

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Changing the Health Care System: Models from Here and Abroad There is an opportunity and a need for change. Much of what needs to be changed are things that government put there in the first place, which need to be corrected. The most obvious example of that is the special tax treatment of health insurance, which is a case of government imposing something on the system that makes it work more poorly. If corrected, it could make the system work better and would impose a degree of discipline. Those kinds of changes are probably going to be essential. Any kind of discipline in the system is going to depend on changes in the rules, particularly in insurance. That will not happen without some form of fairly significant regulatory action. My question for Dr. Bentley is this. I was not sure from your comments —which I found surprisingly critical and negative, for you especially —whether you were criticizing the global budget or the whole effort and direction of health care reform. Two points stood out. First, that we are not going to get anywhere until we have a national consensus. I do not know how we can get a national consensus unless we take on real issues. We do not usually develop consensus in a vacuum. Second, I was surprised, given all that the American Hospital Association has said about community-care networks, if I understood you correctly, that you said that the delivery system is not organized in such a way that hospitals could respond to global budgets or to managed competition because there is a diversity of incentives among physicians. Certainly, that is true, but the suggestion, if indeed this is what you were getting at, that because we cannot respond, these changes will not make sense seems to be putting it backwards. The kinds of changes that the Jackson Hole Group and others are proposing—Garamendi as well—would really force hospitals and physicians to find ways to manage clinical care, to take back clinical autonomy. I do not see how that has happened, given recent history, unless there was some external impetus to it. BENTLEY: I do not disagree with that at all. What I am concerned about is that we get a global budget that creates all the separate pots. That is, the global budget should say, here is a hospital pot, inpatient and/or outpatient. Here is a pot for physicians. Here is a pot for nursing homes and a variety of others. If that happens, we will rigidify the current system. The ability that could be there under alternative models of capitation, that would allow groups to come together in the kind of networks we envision and make decisions about capacity and about practice rules, would be lost. The problem I have with the discussion of a global budget goes back to my first comment. I do not know what it is. In that sense, I guess I probably am more negative.

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Changing the Health Care System: Models from Here and Abroad We do not say what it is that is being budgeted, how it is going to be budgeted, and who is going to make the decision. Those are the hard political topics that need to be engaged, not a matter of whether you are for or against global budgeting. We need to look at the details of global budgeting. Are we applying it just to service delivery? Or, given the comments people have made about capacity, are we budgeting biomedical, behavioral research, and personnel development? Each of these has implications for costs into the future. Are we using just public dollars, as Dr. Reinhardt has just suggested, or private dollars, either private-tax favored or out of pocket after tax? Until some of those things get specified, it is very hard to determine whether global budgets help delivery reform or hurt it. Our biggest worry is that we will not face those questions but hide them. We will choose to rigidify the current structure, and nothing will happen because we will leave the system stuck. REINHARDT: You are right, we do not disagree often, and even on this one, we do not really disagree. I may have misspoken myself. I believe it will be tough to do a global budget now, and it would not be wise to hold President Clinton to victories on cost containment within the next 2 or 3 years. It is unfair to him, and I am not sure that he can do it. I would, however, favor legislating this year the establishment of HIPCs in every state, and for big corporations if they wish. But at least we need state HIPCs. We will need them if we want to have uniform fee schedules. We could use the HIPCs to do what I think we should do, which is to universally insure everyone within 2 years. We could do it through HIPCs. That should be done. I am for a tax cap. I would remove the whole thing and give tax credits the way the Progressive Policy Institute proposes. We could, for example, mandate that everyone use the relative values scales. Within a year we could even define the basic benefit package. I know we could do that within a year. So there are wonderfully progressive things that all lead to the same thing that we could do quickly. The only thing is, I do not think one should promise President Clinton that if he goes the managed competition route, it would solve our problems. It might. It might not. We might embarrass him if we promise too much. SHINE: As I think Dr. Blendon appropriately pointed out, the analysis from Dr. Newhouse's work in terms of Kaiser has been a one-time savings, but not a lot has been done since then. That has occurred in a context in which you have a large fee-for-service activity in which they are competing. My question to anyone on the panel is what would you do with Medi-

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Changing the Health Care System: Models from Here and Abroad care? If, for example, Garamendi gets his way in California, what must happen, if anything, with Medicare to make it work? How would you deal with 40 percent of expenditures or so, most of which now are fee-for-service? REINHARDT: There are two answers to that. One is technical, the other is political. Politically, one should let the program rest for 2 years, because there are enough targets to shoot at. Technically, however, there is no reason why you should not fold elderly individuals into the concept of managed competition. Why should the elderly have a special deal that the rest of us may not have? They could be folded in. In fact, I would add to the other things that should be legislated, for example, the organizations that the Jackson Hole group asked for, the National Health Board and the three subordinate bodies. They are useful and necessary. Ideally, however, the Jackson Hole people should talk about it. In the backs of their minds they have a view of folding not only Medicaid but also Medicare into it. If they have not said it, it is probably a political strategy. QUESTION: I wonder whether there is agreement on the panel as to whether they would recommend that long-term care be folded into this whole equation at this time or later, and why? BLENDON: I cannot imagine a more unpopular question. The answer is that everybody knows it is an area that needs funding. But we are in a situation in which we cannot raise the money to cover the 34 million uninsured people. The problem of eliminating discussion of the global cap was that President Clinton originally thought he could take the money saved by the global cap and use it to cover the 34 million uninsured. Dr. Reinhardt and I have tried to explain why we might not do the global cap. What we will do is to tell middle-class people, who think their health care costs are too high, that the way we will solve the problem is to raise their taxes by eliminating their tax deduction. That may or may not be feasible, but at the moment, our surveys indicate little willingness on the part of taxpayers to pay to cover both the uninsured and long-term care. If we eliminate global savings from everybody else, how else are we going to redistribute those savings to other groups? BENTLEY: Let me add to that. Clearly we would like to have long-term care included because it provides the greatest opportunity to make decisions from preventive to long-term care. In the work that we have had done for us, it is not the nursing home that is the greatest expense. Making a commitment to home care appears to be the greatest expense. Even our current cost estimates, however, assume that we will not

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Changing the Health Care System: Models from Here and Abroad have a large change in behavior with regard to where the baby boom generation decides to institutionalize its parents. Many people wonder what is going to happen in terms of the “moral hazard” of young people who say, “if the system will take care of mom and dad, maybe it is not such a big deal.” If that happens, there probably is not enough money under any strategy to begin to cover it. Somehow, we are going to have to put together a series of strategies that make long-term nursing homes only one alternative to the difficulty of dealing with aged parents. GRINER: I would suggest that, as one thinks of the development of community health networks and integrated delivery systems, one should consider the biggest problem we have with long-term care, that is, over-medicalization. I cannot think of a better way to stimulate reform and to reduce the cost of maintaining the health of the elderly than to force more rational approaches to the management of these patients. That sounds like a very tortuous line of reasoning, but short of that, I am not sure that we are going to have fundamental reform that will take this issue out of the medical arena and put it into the area of social sciences—social, home, and other elements relating to the health of the elderly—as it really should be. QUESTION: There is an alternative to increased taxes to finance the system. What about reducing administrative costs? I understand that administrative costs make up about 25 percent of our health care dollar, compared to, say, 10 percent in Canada. With this HIPC system you would be getting rid of the insurance companies. Would that save enough in administrative costs to make these other innovations possible? STOUGHTON: I have often thought, looking at administrative reform in terms of the Canadian system, that if one were to attempt it out of the context of other systems issues, that it would not resolve the problem. Why do I say that? If you still have the competition element in the system the way it currently exists, as Dr. Reinhardt has said, everybody is going to want every gadget imaginable, irrespective of the appropriateness of having all those things. That will result in overutilization. Thus administrative simplification is not the complete answer to how we are going to pay for all of this. On the other hand, taking any one element out of the context of some other element probably is not the answer either, and so you are in a bind. If you are going to therefore win by insuring everybody and maybe by even affording long-term care, you need a fundamental structural redefinition of how the system works. QUESTION: My implication was not that reducing administrative costs is the only change that needs to be made. We have 6,000 or so intermediaries in this country. There must be some way of simplifying that.

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Changing the Health Care System: Models from Here and Abroad REINHARDT: Certainly, we could do better, even with our present system. If one only used the same relative value scale for every provider, there could be a common billing form. Patients could be billed electronically. That alone would save billions of dollars. The managed competition system will have a fair amount of administrative overhead. If you look at fee-for-service HMOs now—for-profit HMOs —they burn about 20 cents on the dollar for administration and profit. Under the competitive model that the Jackson Hole group has in mind, that itself would become the object of competition, reducing that amount. For-profit HMOs will not be as cheap as the Canadian system, but you must be careful. The cheapest way is not to take the bills and pay for everything. Then you would have the lowest administrative overhead of all. There must be some optimum level of administrative overhead. You can spend too little on paper pushing. We do not know what the right amount is. That is, of course, the hope of the managed competition approach, that administrative costs will become an object of competition. QUESTION: It seems to me that both global budgeting and managed competition are ways of not specifying how you are actually going to acheive budget savings. In any global budget system, you set a cap. You do not talk about the details. That is the providers' or someone else 's problem. To make managed competition work you set a cap. You say that insurance companies must offer the following services at the following prices to everybody. By the way, we are the government, and we are getting out of this. Consumers, if you do not like the way services are being delivered, go to another insurance company. Your insurance company is to blame for the restrictions they are putting on the services. And then all the questions about the coordination of the providers are left to the insurance companies. At some level, certainly in a version of the Garamendi plan of managed competition, that is the inherent structure of the system. So, if it is true that global budgeting and managed competition are ways of displacing blame, does anybody seriously believe that someone has a system in which they are able to control costs by taking responsibility for the consequences at the detail level? BLENDON: The tracking data that we have indicates that we are at a 40-year high in interest in a national health plan and a 30-year high in distrust of the federal government. Thus we have the oddity of people wanting a plan that the government will not handle. That means that we are looking for alternatives. We have seen some of these alternative organizations, and again we look at other countries and we look at Kaiser. We

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Changing the Health Care System: Models from Here and Abroad look at the data from other countries and Kaiser and say that it is possible to slow the rate of increase in expenditures for some period. However, somebody has to take the heat. The question is, could government do it? Probably not today. And so we are looking for some intermediate organization that will make the decisions. I once heard Secretary of Labor Robert Reich say that someone is not going to provide all the care that doctors and patients want. The question is whether that someone is private or public. QUESTION: Certainly one of the promises made to providers in Canada for going along with global budgets was clinical autonomy. Having just come back from a meeting with the Health Ministry in British Columbia, I find that they now see that clinical autonomy is their leading problem, particularly among physician providers. They feel somewhat constrained in what they can do about it, because, unlike what they see in the United States with organizations trying to deal among providers in different organizational and selective structures, they cannot do anything about it. In fact, the Canadian government recently tried to limit the ability of physicians to settle where they want, but they got beat on that. STOUGHTON: You are absolutely right. We have talked before about volume-driven activities being major cost factors for a system from year to year. Unfortunately, there are no structures in the Canadian system that even begin to approach managed care. There has also been no incentive for those structures to materialize to any degree. Therefore, one looks at the United States and says the United States should be able to do better because some of those structures exist, and maybe there is a way to get on top of the issues you are raising through some of those structures. REINHARDT: On the delivery side, the United States will be extremely inventive and will ultimately develop the kinds of systems, among them the fishbowl, that the Canadians and the Europeans will copy. For that reason alone, it is worth pursuing the ideas of the Jackson Hole Group. They have been fairly well thought out. My only criticism of them is that sometimes they seem to promise a little too much. I would urge them not to do that. We are quite a ways away from having a reliable clinical quality indicator. We can have patient satisfaction indicators much more quickly. It may not be the sole answer to the cost problem, but it is a great platform from which to build. That is why one should really work with them and encourage it. I do believe that the rest of the world will ultimately copy that.

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Changing the Health Care System: Models from Here and Abroad SHINE: I want to acknowledge and thank Richard and Hinda Rosenthal, and Marion Ein Lewin, who helped organize this program. I especially want to thank John Iglehart, the moderator, Dr. Reinhardt for his remarks, and all of our commentators for a very provocative and stimulating discussion.