Careless Health Industry

How corporate America perpetuates the health care crisis

By Ronda Washington, RN

Let’s be honest—very few political operatives, politicians or pundits actually want to explore the real-life, day-to-day economic challenges facing the American people, because to explore them would ultimately force us to admit that our entire venerated political system is totally corrupt.

Take this idiotically simple question that is almost never asked in the normal course of this country’s political debate: Why do we hear so much about how well-off America is, yet our country has the highest number of uninsured citizens in the industrialized world?

Why isn’t that question asked? Because you can’t answer it honestly without exploring how Corporate America has bought off enough politicians to make sure our government helps corporations perpetuate this travesty.

I’m not naïve. I know that corporations exist for one reason and one reason only: the relentless, single-minded pursuit of profit, no matter who gets shafted. That is their stated purpose in a capitalist society, and that’s fine. But in our country, corporations aren’t supposed to pursue this purpose in a vacuum, unchecked, unregulated, and unopposed. There is supposed to be a counterweight, a government separate from Big Business whose job is to prevent the corporate profit motive from destroying society. That government once passed laws protecting the environment, so the profit motive wouldn’t end up eliminating breathable air. That government once protected workers, so the profit motive wouldn’t result in Americans toiling in sweatshops. And that government once demanded better wages, so the profit motive wouldn’t result in a race to the bottom for poverty-level paychecks. But that government, as we all know, is long gone. Our government has been the victim of a hostile takeover. Over the last thirty years, Corporate America has applied its most effective business tactics to the task of purchasing the one commodity that’s not supposed to be for sale: American democracy.

To fight back, I decided to write a guidebook to help people see exactly how politicians’ lies, myths and half-truths justify government policies that allow Corporate America to rip us off. That book, Hostile Takeover: How Big Money & Corruption Conquered our Government—and How We Can Take It Back, is meant to provide a window into the one fact that the corporate lobbyists and their tools in the government don’t want you to know: that the problems undermining America on a daily basis can be fixed if our government starts representing the interests of ordinary people.

To give you a flavor of the book, consider this excerpt that analyzes the health care crisis—a particularly newsworthy issue considering the recent headlines about Massachusetts moving toward a universal health care system. The Bay State’s moves are certainly controversial—especially the steep mandates on uninsured individuals and the desperate efforts to protect the health insurance industry. But they show that the issue is now simmering to a boil not only in Washington, but in state capitals all over America.

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The Institute of Medicine was created by Congress in 1970 to be the chief, nonpartisan adviser to the federal government on all matters related to health care. That’s why the announcement it made in 2004 was so stunning. “Lack of health insurance causes roughly 18,000 unnecessary deaths every year in the United States,” the Institute said. Therefore, “By 2010, everyone in the United States should have health insurance … [The Institute] urges the president and Congress to act immediately by establishing a firm and explicit plan to reach this goal.”

The health care system, which is supposed to preserve and protect human life, is allowing thousands of Americans to die every year, and America’s top experts were sounding the alarm.

So how is it that government and media have settled into complacency when the system is so bad for so many? The status quo pays big dividends.

In 2004, HMOs nearly doubled their profits from just a year before, adding $10 billion to their bottom line. That year, top executives at the 11 largest health insurers made a combined $85 million in one year. In the first three quarters of 2007, HMO profits increased by another 33 percent. The sheer numbers behind these profits are staggering: In 2007 alone, the four biggest health insurance companies reported $150 billion in revenues. That’s $410 million a day, every day, 365 days of the year.

That’s the kind of cash that allowed the health industry to spend more than $300 million on lobbying in 2003, and another $300 million on campaign contributions to politicians since 2000. Their agenda is pretty simple: stop any proposals to curb health care profiteering by private insurance companies.

To make its arguments, the industry buys off high-profile ex-politicians and makes them its spokespeople. Take Marc Racicot—one of Corporate America’s favorite tools. This former governor of Montana left public service to become an Enron lobbyist, then became chairman of the Republican National Committee, and then headed President Bush’s re-election campaign. Now, looking once again to cash in, Racicot has taken a job as the public shill for the insurance industry’s chief lobbying group in Washington, D.C. His direct access to the president will undoubtedly serve him well in that role.

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Old pros in Washington know one of the easiest ways to kill a good idea is to invoke Americans’ fear of a slow, bloated government bureaucracy. In 2004, White House Press Secretary Scott McClellan attacked President Bush’s opponents for wanting “a government-run system, where the taxpayers will pick up more of the tab” for health care. Republican National Committee Chairman Ed Gillespie, previously head of a health industry lobbying firm, declared that “the American people have rejected a government-run system of national health care.”

But most Americans have not. According to a nationwide ABC/Washington Post poll in 2003, “Americans by a 2-1 margin, 62-32 percent, prefer a universal health insurance program over the current [private] employer-based system.”

Doctors, too, are chiming in with support for universal health insurance. In 2003, the prestigious—and conservative—Journal of the American Medical Association published a proposal for government-sponsored universal health care that was endorsed by more than 8,000 physicians (including two former surgeon general’s).

Even parts of the business community support government intervention. For instance, Ford, GM and Chrysler all endorsed Canada’s system, where the government funds health care for all citizens. Similarly, a poll of Michigan small businesses found that 63 percent supported creating a universal health care system, even if it required tax increases. The health insurance industry, you see, is not only gouging patients—it is gouging employers who provide health care benefits to workers.

Still, everywhere you turn there is a politician deriding any proposal to use the power of government to expand health care? “When government writes the checks when it comes to health care, they start writing the rules when it comes to health care,” said President Bush during the 2004 campaign. “And when they start writing the rules when it comes to health care, they start making decisions for you when it comes to your health care, and they start making decisions for the doctors when it comes to health care.”

Sadly, the media reports this drivel with little question, even though it would only take one question to deflate Bush’s entire argument: If “government-run” health care is inherently bad, as he and the health care industry claim, wouldn’t Americans hate Medicare? The answer is yes, but they don’t—the program is widely considered one of the most popular in American history.

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In 2004, Senate Majority Leader Bill Frist (R-Tenn.) was asked whether America could afford to provide health care to all of its citizens. As the first surgeon to head the Senate, some were hoping Frist would address the situation optimistically. Instead, he said, “it is impossible to get everybody covered,” citing the fact that his home state was “going bankrupt” trying to achieve universal coverage.

The mind reels at how someone like Frist could claim the government does not have enough money to deal with health care. His comment, after all, came just a few years after his family was forced to pay $1.7 billion in criminal and civil fines for trying to rip off Medicare while running the nation’s largest for-profit hospital chain


Fiscal prudence is needed in our health-care solution

By Arm N. Hammer

Principles of decency, fairness and respect lead me to support reform of health-care insurance in the United States. Acknowledging that 18,000 people die every year because of lack of access to health care and acknowledging that extremely ill people often must battle their insurance companies make turning our backs on the problems of our current system impossible and unconscionable.

Almost everyone agrees we need a universal plan, but most plans discussed now that require everyone to purchase insurance, often-stripped-down plans from for-profit insurance companies, will produce more waste and more inefficiency. My fiscal-conservative principles revolt against such plans.

The waste is undeniable. Under our current for-profit system, about one-third of every health-care dollar goes for something other than our health care.

Private-insurance companies take the first 15 to 25 percent. They take it for profits and overhead. Private insurance is indeed profitable, nearly $10 billion in 2006 for the top seven insurers, and those companies pay their chief-executive officers hefty salaries to keep those profits high. In 2005, United Health Group’s CEO was the third highest-paid CEO in the country, enough to cover health-care costs for 34,000 people.

In addition to the CEO, they employ thousands of people. Hiring employees doesn’t sound wasteful until we look at a comparison. In Massachusetts, which recently adopted a plan mandating everyone purchase insurance, Blue Cross has more employees for its 2.5 million customers than Canada, under a single-payer system, has for its 30 million citizens. Private insurance needs legions of workers to deny us our benefits or to reject us a customer.

The companies even buy computer software to help in that effort, software that can help dig through past claims or look for reasons to deny payment. Sales of such software grew to $7.5 billion last year, money that didn’t go to our health care.

Of course, the companies use our premium dollars for advertising and lobbying also in order to increase and protect their business.

If we take the profit out of health-care insurance, we obviously decrease the waste. Medicare, which is a single-payer system, has an overhead of 3 to 4 percent as compared to the 15 to 25 percent for private insurance. A single-payer system eliminates exorbitant CEO salaries, an overstaffed bureaucracy, advertising, lobbying, and, need I say, profit.

The waste doesn’t stop with the skimming off the companies do. The health-insurance industry causes a nightmare for hospitals and physicians, a nightmare that costs another 12 percent of our insurance premiums. To deal with the paperwork, they have to hire more clerical workers than nurses. The physicians end up in disputes with the insurance companies, causing them time and more money. Single-payer eliminates that absurdity because providers will send their claims to one place to get paid, the National Health Insurance Program, instead of thousands of different companies.

As a fiscal conservative, I say we must end the waste. House Resolution 676, or Improved Medicare for All, calls for a single-payer system that will provide us a choice of providers with no premiums and no deductibles and more coverage than a majority of us have now. Such a system could put decision-making back into the hands of doctors and patients instead of private insurance bureaucrats while, at the same time, eliminating the waste.

HR676
National Health Insurance Act

A totally unique approach to health insurance reform

By Hail Hamilton

What Is National Health Insurance (NHI)?

To begin with, it is NOT “Socialized Medicine”, far from it in fact.  Also, it does not mean that our medical system will be taken over by the government and run like the post office as many of our opposition friends would mistakenly have you believe.

Basically, House Resolution (H.R.) 676, the “New Expanded Medicare” bill now in sub-committee in the House of Representatives simply creates a new and far more functional “single payer” method of paying for medical services while leaving the medical system itself completely alone and intact.  This will eliminate the hundreds of complicated and redundant payment plans currently imposed on the system by private “for profit” health insurance companies and save literally BILLIONS of dollars every year by eliminating such wasteful duplication.  This will allow your doctors offices and hospitals to function much more efficiently and serve your needs much more effectively as well.   Just imagine what a huge benefit this will be!

Taxes: We all know that nothing of any real value is ever free, but if you think of the taxes that will be required to support national health insurance as simply a lower cost alternative to the staggering private health insurance premiums that most of us already have to pay but which will be totally eliminated under the new system, then it becomes immediately clear that this could be a really good deal after all!

Check out some of the tremendous benefits that NHI will bring and see what you think:

• Every citizen of the US will be covered from birth to death.

• No more pre-existing conditions to be excluded from coverage.

• No more expensive deductibles or co-pays.

• All prescription medications will be covered.

• All dental and eye care will be included.
  
  

• Mental health and substance abuse care will be fully covered.

• Long term and nursing home services will be included.

• You will always choose your own doctors and hospitals.

• Costs of coverage will be assessed on a sliding scale basis.

• Tremendously simplified system of medical administration

• Total portability – your coverage not tied to any job or location.

• Existing Medicare benefits for those over 65 will remain the same or be vastly improved in many cases.

The real irony is that this new system will be a lot less expensive and provide much better services than the largely dysfunctional system currently in place and still leave us with the best health care system in the entire world, only with the New Medicare… it will be even better!

Don’t be put off by all of the misleading and often inaccurate rhetoric that you so often hear about changing our system.  For example uninformed critics will ask “Do you really want your medical decisions made by some government bureaucrat in Washington?”  Well, the truth is that with NHI, just about every medical decision will be made privately by you and your doctor.  But ironically, under the current system, many medical decisions about what’s best for you are now being made by some corporate bureaucrat working for a private insurance company whose main concern is making larger profits by denying your claims.  How exactly does that work out to be better for you??

Change is indeed often a very scary thing to most people, but when the need is so great and the proposed changes are so much better than the status quo, maybe changing to a NHI system in the USA is something that we can all think about supporting, whether you are a moderate, liberal or conservative, after giving it a lot of careful study and thought.  Please call your congressperson and let them know what you think.  They really need to hear from you.

HR 676: Help for U.S. business, big and small, hurting because of our current health-insurance system

By Jane Doe

The practice of work-related health insurance began as a way for employers to get around the wage controls of the Second World War. The idea worked then, providing companies a way to attract the best workers in a time of labor shortage.

Today, though, corporations find providing health insurance for their employees too costly. Since 2000, health-insurance premiums have risen 87 percent. The average employer-based premium for a family is more than $11,000 (more than most minimum-wage workers can earn in a year). Faced with such exorbitant premiums, employers have felt the pressure to switch to plans with high deductibles for their employees or to eliminate health plans entirely. They also have had to cut jobs. Chrysler announced it would close two factories and do away with 13,000 jobs to reduce their health-insurance costs.

Some companies, General Motors, for example, have cut benefits but still find their costs so high they cannot compete in today’s global economy. Their very existence is in danger. Ford Motor Co. carries insurance on 570,000 people, including past employees and current employees and their dependents, spending $3.5 billion last year. Those costs add $1,200 to every vehicle they produce, creating a serious disadvantage in competing with companies in countries with a national health-insurance plan. Beyond any doubt, high insurance costs hurt American industry.

Small businesses that offer their employees health insurance suffer also. Some businesses face 50 percent premium increases yearly. In order to cover exorbitant health-insurance expenditures, they often cut staff in order to keep the business running. Cutting staff, though, means more responsibility and more stress for the remaining workers. Small businesses that do not offer insurance have a profit advantage over those that do, but because of the disadvantages around hiring and retaining reliable, good workers, they too want to fix our broken health-care system.

With both big and small business, the money spent on health insurance is money not spent on growth, innovation, or higher wages.

A single-payer system, such as HR 676, Improved Medicare for All, will benefit business in general. The plan will contain and stabilize costs and eliminate the waste generated by the for-profit system (which I will examine in another article) while providing health care for everyone. Costs for employers would drop dramatically and benefits would improve. Those lower costs would go into profits, profits that could be used for capital improvements or adding more employees or improving salaries. With everyone insured, business could expect healthier employees and higher productivity, less absenteeism, and lower employee turnover. United States business could once again be competitive.

Most importantly, employers and patients would feel secure since no money changes hands and the cost of illness is spread evenly across the entire population. Single-payer health insurance as proposed by HR 676 would be a big step towards improved health care for all Americans and a giant leap towards truly universal health care like that enjoyed in all the other developed nations in the world.

Prescription for health care: election year proposals

Have We Turned the Corner? Are we ready for a compromise to single-payer universal health insurance? Or will we get more of the same?

Democratic versus Republican plans

By Dr. Edward R. Smith

All the evidence suggests that it has finally become politically possible to give Americans what citizens of every other advanced nation already have: guaranteed health insurance. The economics of universal health care are sound, and polls show strong public support for guaranteed care. The only thing we have to fear is fear itself.

Unfortunately, there's a lot of that around.

True, one kind of fear seems, provisionally, to have been overcome: the timidity of Democratic politicians scarred by the failure of the original Clinton health plan.

To see how much things have changed, consider Hillary Clinton's evolution. Just 15 months ago, The New York Times reported that "her plans to expand coverage are tempered and incremental," and that "she continues to shy from the ultimate challenge: describing what a comprehensive Democratic health care plan would look like."

Indeed, when she was asked how costs might be controlled, she demurred: "It depends on what kind of system you're devising. And that's still not at all clear to me, what the body politic will bear."

But that was then.

John Edwards broke the issue of health care reform open in February, when he proposed a smart and serious plan for universal health insurance -- and bravely announced his willingness to pay for the plan by letting some of the Bush tax cuts expire. Suddenly, universal health care went from being a distant progressive dream to something you could actually envision happening in the next administration.

Clinton delayed a long time before coming out with her own plan -- a delay that created a lot of anxiety among health care reformers, and may, as I'll explain in a minute, be a bad omen for the future. Still, last week she did deliver a plan, and it's as strong as the Edwards plan -- because unless you get deep into the fine print, the Clinton plan basically is the Edwards plan.

That's not a criticism; it's much more important that a politician get health care right than that he or she score points for originality. Clinton may be politically cautious, but she does understand health care economics and she knows a good thing when she sees it.

The Edwards and Clinton plans as well as the slightly weaker but similar Obama plan achieve universal-or-near-universal coverage through a well-thought-out combination of insurance regulation, subsidies and public-private competition. Those plans may disappoint advocates of a cleaner, simpler single-payer system. But it's hard to see how Medicare for all could get through Congress any time in the near future, whereas Edwards-type plans offer a reasonable second-best that you can actually envision being enacted by a Democratic Congress and signed by a Democratic president just two years from now.

To get there, however, would require overcoming a lot more fear.

There won't be a serious Republican alternative. The health care plans of the leading Republican candidates, such as they are, are the same old, same old: They principally rely on tax breaks that go mainly to the well-off, but supposedly will conjure up the magic of the market. As Ezra Klein of The American Prospect cruelly but accurately puts it: "The Republican vision is for a world in which the sick and dying get to deduct some of the cost of health insurance that they don't have -- and can't get -- on their taxes."

But the GOP nominee, most likely John McCain, won't be trying to convince the public of the merits of his own plan. Instead, he'll try to scare the dwindling fraction of Americans who still have good health insurance by claiming that the Democrats will take it away.

The smear-and-fear campaign already has started. The Democratic plans all bear a strong resemblance to the health care plan that Mitt Romney signed into law as governor of Massachusetts, differing mainly in offering Americans additional choices. But that didn't stop Romney from denouncing the Clinton plan as "European-style socialized medicine." And Fred Thompson claims that the Clinton plan denies choice -- which it actually offers in abundance -- and relies on "punishment" instead.

Those attacks probably won't be effective enough to prevent a Democrat from winning next year. But that won't be the end of the story: even if the Democrats take the White House and expand their congressional majorities, the insurance and drug lobbies will try to bully them into backing down on their campaign promises.

That's why the long delay before Clinton announced her health care plan made supporters of universal care, myself included, so nervous -- a nervousness that is not completely assuaged by the fact that she finally did deliver. Although it’s good to know that whoever gets the Democratic nomination will make health care top priority, it’s too bad their proposals fall far short of a truly universal single-payer plans. But perhaps half a loaf is better than none. Almost anything is better than what we now have.  What remains is the question of whether he or she will have the determination to make that plan a reality.

One thing is certain: the health care crisis will not go away. With 45 millions uninsured and millions more underinsured, the next president must lead the nation out of health insurance morass toward an equitable solution for all Americans. What remains is the question of whether he or she will have the determination to make that plan a reality

The Health Care Crisis and What to Do About It

By Dr. Charles Stuart

Journal of American Medicine

Fifteen years ago Bill Clinton became president partly because he promised to do something about rising health care costs. Although Clinton's chances of reforming the US health care system looked quite good at first, the effort soon ran aground. Since then a combination of factors—the unwillingness of other politicians to confront the insurance and other lobbies that so successfully frustrated the Clinton effort, a temporary remission in the growth of health care spending as HMOs briefly managed to limit cost increases, and the general distraction of a nation focused first on the gloriousness of getting rich, then on terrorism—have kept health care off the top of the agenda.

But medical costs are once again rising rapidly, forcing health care back into political prominence. Indeed, the problem of medical costs is so pervasive that it underlies three quite different policy crises. First is the increasingly rapid unraveling of employer- based health insurance. Second is the plight of Medicaid, an increasingly crucial program that is under both fiscal and political attack. Third is the long-term problem of the federal government's solvency, which is, as we'll explain, largely a problem of health care costs.

The good news is that we know more about the economics of health care than we did when Clinton tried and failed to remake the system. There's now a large body of evidence on what works and what doesn't work in health care, and it's not hard to see how to make dramatic improvements in US practice. As we'll see, the evidence clearly shows that the key problem with the US health care system is its fragmentation. A history of failed attempts to introduce universal health insurance has left us with a system in which the government pays directly or indirectly for more than half of the nation's health care, but the actual delivery both of insurance and of care is undertaken by a crazy quilt of private insurers, for-profit hospitals, and other players who add cost without adding value. A Canadian-style single-payer system, in which the government directly provides insurance, would almost surely be both cheaper and more effective than what we now have. And we could do even better if we learned from "integrated" systems, like the Veterans Administration, that directly provide some health care as well as medical insurance.

The bad news is that Washington currently seems incapable of accepting what the evidence on health care says. In particular, the Bush administration is under the influence of both industry lobbyists, especially those representing the drug companies, and a free-market ideology that is wholly inappropriate to health care issues. As a result, it seems determined to pursue policies that will increase the fragmentation of our system and swell the ranks of the uninsured.

Before we talk about reform, however, let's talk about the current state of the US health care system. Let us begin by asking a seemingly naive question: What's wrong with spending ever more on health care?

1.

Is health care spending a problem?

In 1960 the United States spent only 5.2 percent of GDP on health care. By 2004 that number had risen to 16 percent. At this point America spends more on health care than it does on food. But what's wrong with that?

The starting point for any discussion of rising health care costs has to be the realization that these rising costs are, in an important sense, a sign of progress. Here's how the Congressional Budget Office puts it, in the latest edition of its annual publication The Long-Term Budget Outlook:

Growth in health care spending has outstripped economic growth regardless of the source of its funding.... The major factor associated with that growth has been the development and increasing use of new medical technology.... In the health care field, unlike in many sectors of the economy, technological advances have generally raised costs rather than lowered them.

Notice the three points in that quote. First, health care spending is rising rapidly "regardless of the source of its funding." Translation: although much health care is paid for by the government, this isn't a simple case of runaway government spending, because private spending is rising at a comparably fast clip. "Comparing common benefits," says the Kaiser Family Foundation,

changes in Medicare spending in the last three decades has largely tracked the growth rate in private health insurance premiums. Typically, Medicare increases have been lower than those of private health insurance.

Second, "new medical technology" is the major factor in rising spending: we spend more on medicine because there's more that medicine can do. Third, in medical care, "technological advances have generally raised costs rather than lowered them": although new technology surely produces cost savings in medicine, as elsewhere, the additional spending that takes place as a result of the expansion of medical possibilities outweighs those savings.

So far, this sounds like a happy story. We've found new ways to help people, and are spending more to take advantage of the opportunity. Why not view rising medical spending, like rising spending on, say, home entertainment systems, simply as a rational response to expanded choice? We would suggest two answers.

The first is that the US health care system is extremely inefficient, and this inefficiency becomes more costly as the health care sector becomes a larger fraction of the economy. Suppose, for example, that we believe that 30 percent of US health care spending is wasted, and always has been. In 1960, when health care was only 5.2 percent of GDP, that meant waste equal to only 1.5 percent of GDP. Now that the share of health care in the economy has more than tripled, so has the waste.

This inefficiency is a bad thing in itself. What makes it literally fatal to thousands of Americans each year is that the inefficiency of our health care system exacerbates a second problem: our health care system often makes irrational choices, and rising costs exacerbate those irrationalities. Specifically, American health care tends to divide the population into insiders and outsiders. Insiders, who have good insurance, receive everything modern medicine can provide, no matter how expensive. Outsiders, who have poor insurance or none at all, receive very little. To take just one example, one study found that among Americans diagnosed with colorectal cancer, those without insurance were 70 percent more likely than those with insurance to die over the next three years.

In response to new medical technology, the system spends even more on insiders. But it compensates for higher spending on insiders, in part, by consigning more people to outsider status—robbing Peter of basic care in order to pay for Paul's state-of-the-art treatment. Thus we have the cruel paradox that medical progress is bad for many Americans' health.

This description of our health care problems may sound abstract. But we can make it concrete by looking at the crisis now afflicting employer-based health insurance.

2.

The unraveling of employer-based insurance

In 2003 only 16 percent of health care spending consisted of out-of-pocket expenditures by consumers. The rest was paid for by insurance, public or private. As we'll see, this heavy reliance on insurance disturbs some economists, who believe that doctors and patients fail to make rational decisions about spending because third parties bear the costs of medical treatment. But it's no use wishing that health care were sold like ordinary consumer goods, with individuals paying out of pocket for what they need. By its very nature, most health spending must be covered by insurance.

The reason is simple: in any given year, most people have small medical bills, while a few people have very large bills. In 2003, health spending roughly followed the "80–20 rule": 20 percent of the population accounted for 80 percent of expenses. Half the population had virtually no medical expenses; a mere 1 percent of the population accounted for 22 percent of expenses.

Here's how Henry Aaron and his coauthors summarize the implication of these numbers in their book Can We Say No?: "Most health costs are incurred by a small proportion of the population whose expenses greatly exceed plausible limits on out-of-pocket spending." In other words, if people had to pay for medical care the way they pay for groceries, they would have to forego most of what modern medicine has to offer, because they would quickly run out of funds in the face of medical emergencies.

So the only way modern medical care can be made available to anyone other than the very rich is through health insurance. Yet it's very difficult for the private sector to provide such insurance, because health insurance suffers from a particularly acute case of a well-known economic problem known as adverse selection. Here's how it works: imagine an insurer who offered policies to anyone, with the annual premium set to cover the average person's health care expenses, plus the administrative costs of running the insurance company. Who would sign up? The answer, unfortunately, is that the insurer's customers wouldn't be a representative sample of the population. Healthy people, with little reason to expect high medical bills, would probably shun policies priced to reflect the average person's health costs. On the other hand, unhealthy people would find the policies very attractive.

You can see where this is going. The insurance company would quickly find that because its clientele was tilted toward those with high medical costs, its actual costs per customer were much higher than those of the average member of the population. So it would have to raise premiums to cover those higher costs. However, this would disproportionately drive off its healthier customers, leaving it with an even less healthy customer base, requiring a further rise in premiums, and so on.

Insurance companies deal with these problems, to some extent, by carefully screening applicants to identify those with a high risk of needing expensive treatment, and either rejecting such applicants or charging them higher premiums. But such screening is itself expensive. Furthermore, it tends to screen out exactly those who most need insurance.

Most advanced countries have dealt with the defects of private health insurance in a straightforward way, by making health insurance a government service. Through Medicare, the United States has in effect done the same thing for its seniors. We also have Medicaid, a means-tested program that provides health insurance to many of the poor and near poor. But nonelderly, nonpoor Americans are on their own. In practice, only a tiny fraction of nonelderly Americans (5.3 percent in 2003) buy private insurance for themselves. The rest of those not covered by Medicare or Medicaid get insurance, if at all, through their employers.

Employer-based insurance is a peculiarly American institution. As Julius Richmond and Rashi Fein tell us in The Health Care Mess, the dominant role of such insurance is the result of historical accident rather than deliberate policy. World War II caused a labor shortage, but employers were subject to controls that prevented them from attracting workers by offering higher wages. Health benefits, however, weren't controlled, and so became a way for employers to compete for workers. Once employers began offering medical benefits, they also realized that it was a form of compensation workers valued highly because it protected them from risk. Moreover, the tax law favored employer-based insurance, because employers' contributions weren't considered part of workers' taxable income. Today, the value of the tax subsidy for employer-based insurance is estimated at around $150 billion a year.

Employer-based insurance has historically offered a partial solution to the problem of adverse selection. In principle, adverse selection can still occur even if health insurance comes with a job rather than as a stand-alone policy. This would occur if workers with health problems flocked to companies that offered health insurance, while healthy workers took jobs at companies that didn't offer insurance and offered higher wages instead. But until recently health insurance was a sufficiently small consideration in job choice that large corporations offering good health benefits, like General Motors, could safely assume that the health status of their employees was representative of the population at large and that adverse selection wasn't inflating the cost of health insurance.

In 2004, according to census estimates, 63.1 percent of Americans under sixty-five received health insurance through their employers or family members' employers. Given the inherent difficulties of providing health insurance through the private sector, that's an impressive number. But it left more than a third of nonelderly Americans out of the system. Moreover, the number of outsiders is growing: the share of nonelderly Americans with employment-based health insurance was 67.7 percent as recently as 2000. And this trend seems certain to continue, even accelerate, because the whole system of employer-based health care is under severe strain.

We can identify several reasons for that strain, but mainly it comes down to the issue of costs. Providing health insurance looked like a good way for employers to reward their employees when it was a small part of the pay package. Today, however, the annual cost of coverage for a family of four is estimated by the Kaiser Family Foundation at more than $10,000. One way to look at it is to say that that's roughly what a worker earning minimum wage and working full time earns in a year. It's more than half the annual earnings of the average Wal-Mart employee.

Health care costs at current levels override the incentives that have historically supported employer-based health insurance. Now that health costs loom so large, companies that provide generous benefits are in effect paying some of their workers much more than the going wage—or, more to the point, more than competitors pay similar workers. Inevitably, this creates pressure to reduce or eliminate health benefits. And companies that can't cut benefits enough to stay competitive—such as GM—find their very existence at risk.

Rising health costs have also ended the ability of employer-based insurance plans to avoid the problem of adverse selection. Anecdotal evidence suggests that workers who know they have health problems actively seek out jobs with companies that still offer generous benefits. On the other side, employers are starting to make hiring decisions based on likely health costs. For example, an internal Wal-Mart memo, reported by The New York Times in October, suggested adding tasks requiring physical exertion to jobs that don't really require it as a way to screen out individuals with potential health risks.

So rising health care costs are undermining the institution of employer-based coverage. We'd suggest that the drop in the number of insured so far only hints at the scale of the problem: we may well be seeing the whole institution unraveling.

Notice that this unraveling is the byproduct of what should be a good thing: advances in medical technology, which lead doctors to spend more on their patients. This leads to higher insurance costs, which causes employers to stop providing health coverage. The result is that many people are thrown into the world of the uninsured, where even basic care is often hard to get. As we said, we rob Peter of basic care in order to provide Paul with state-of-the-art treatment.

Fortunately, some of the adverse consequences of the decline in employer-based coverage have been muted by a crucial government program, Medicaid. But Medicaid is facing its own pressures.

3.

Medicaid and Medicare

The US health care system is more privatized than that of any other advanced country, but nearly half of total health care spending nonetheless comes from the government. Most of this government spending is accounted for by two great social insurance programs, Medicare and Medicaid. Although Medicare gets most of the public attention, let's focus first on Medicaid, which is a far more important program than most middle-class Americans realize.

In The Health Care Mess Richmond and Fein tell us that Medicaid, like employer-based health insurance, came into existence through a sort of historical accident. As Lyndon Johnson made his big push to create Medicare, the American Medical Association, in a last-ditch effort to block so-called "socialized medicine" (actually only the insurance is socialized; the medical care is provided by the private sector), began disparaging Johnson's plan by claiming that it would do nothing to help the truly needy. In a masterful piece of political jujitsu, Johnson responded by adding a second program, Medicaid, targeted specifically at helping the poor and near poor.

Today, Medicaid is a crucial part of the American safety net. In 2004 Medicaid covered almost as many people as its senior partner, Medicare—37.5 million versus 39.7 million.

Medicaid has grown rapidly in recent years because it has been picking up the slack from the unraveling system of employer-based insurance. Between 2000 and 2004 the number of Americans covered by Medicaid rose by a remarkable eight million. Over the same period the ranks of the uninsured rose by six million. So without the growth of Medicaid, the uninsured population would have exploded, and we'd be facing a severe crisis in medical care.

But Medicaid, even as it becomes increasingly essential to tens of millions of Americans, is also becoming increasingly vulnerable to political attack. To some extent this reflects the political weakness of any means-tested program serving the poor and near poor. As the British welfare scholar Richard Titmuss said, "Programs for the poor are poor programs." Unlike Medicare's clients—the feared senior group—Medicaid recipients aren't a potent political constituency: they are, on average, poor and poorly educated, with low voter participation. As a result, funding for Medicaid depends on politicians' sense of decency, always a fragile foundation for policy.

The complex structure of Medicaid also makes it vulnerable. Unlike Medicare, which is a purely federal program, Medicaid is a federal-state matching program, in which states provide on average about 40 percent of the funds. Since state governments, unlike the federal government, can't engage in open-ended deficit financing, this dependence on state funds exposes Medicaid to pressure whenever state budgets are hard-pressed. And state budgets are hard-pressed these days for a variety of reasons, not least the rapidly rising cost of Medicaid itself.

The result is that, like employer-based health insurance, Medicaid faces a possible unraveling in the face of rising health costs. An example of how that unraveling might take place is South Carolina's request for a waiver of federal rules to allow it to restructure the state's Medicaid program into a system of private accounts. We'll discuss later in this essay the strange persistence, in the teeth of all available evidence, of the belief that the private sector can provide health insurance more efficiently than the government. The main point for now is that South Carolina's proposed reform would seriously weaken the medical safety net: recipients would be given a voucher to purchase health insurance, but many would find the voucher inadequate, and would end up being denied care. And if South Carolina gets its waiver, other states will probably follow its lead.

Medicare's situation is very different. Unlike employer-based insurance or Medicaid, Medicare faces no imminent threat of large cuts. Although the federal government is deep in deficit, it's not currently having any difficulty borrowing, largely from abroad, to cover the gap. Also, the political constituency behind Medicare remains extremely powerful. Yet federal deficits can't go on forever; even the US government must eventually find a way to pay its bills. And the long-term outlook for federal finances is dire, mainly because of Medicare and Medicaid.

Health care costs to America have caused long-term budget problems. According to the Congressional Budget Office projection of spending over the next twenty-five years on the three big entitlement programs, Social Security, Medicare, and Medicaid, measured as a percentage of GDP. Not long ago advocates of Social Security privatization tried to use projections like this one to foster a sense of crisis about the retirement system. As was pointed out last year in these pages, however, there is no program called Social Security Medicare and Medicaid. In fact, Social Security, whose costs will rise solely because of the aging of the population, represents only a small part of the problem. Most of the problem comes from the two health care programs whose spending is rising mainly because of the general rise in medical costs.

To be fair, there is a demographic component to Medicare and Medicaid spending too—Medicare because it only serves Americans over sixty-five, Medicaid because the elderly, although a minority of the program's beneficiaries, account for most of its spending. Still, the principal factor in both programs' rising costs is what the CBO calls "excess cost growth"—the persistent tendency of health care spending per beneficiary to grow faster than per capita income, owing to advancing medical technology. Without this excess cost growth, the CBO estimates that entitlement spending would rise by only 3.7 percent of GDP over the next twenty-five years. That's a significant rise, but not overwhelming, and could be addressed with moderate tax increases and possibly benefit cuts. But because of excess cost growth the projected rise in spending is a crushing burden—about 10 percent of GDP over the next twenty-five years, and even more thereafter.

Rising health care spending, then, is driving a triple crisis. The fastest-moving piece of that crisis is the unraveling of employer-based coverage. There's a gradually building crisis in Medicaid. And there's a long-term federal budget crisis driven mainly by rising health care spending.

So what are we going to do about health care?

4.

The "consumer-directed" diversion

As we pointed out at the beginning of this essay, one of the two big reasons to be concerned about rising spending on health care is that as the health care sector grows, its inefficiency becomes increasingly important. And almost everyone agrees that the US health care system is extremely inefficient. But there are wide disagreements about the nature of that inefficiency. And the analysts who have the ear of the Bush administration are committed, for ideological reasons, to a view that is clearly wrong.

We've already alluded to the underlying view behind the Bush administration's health care proposals: it's the view that insurance leads people to consume too much health care. The 2004 Economic Report of the President, which devoted a chapter to health care, illustrated the alleged problem with a parable about the clothing industry:

Suppose, for example, that an individual could purchase a clothing insurance policy with a "coinsurance" rate of 20 percent, meaning that after paying the insurance premium, the holder of the insurance policy would have to pay only 20 cents on the dollar for all clothing purchases. An individual with such a policy would be expected to spend substantially more on clothes—due to larger quantity and higher quality purchases—with the 80 percent discount than he would at the full price.... The clothing insurance example suggests an inherent inefficiency in the use of insurance to pay for things that have little intrinsic risk or uncertainty.

The report then asserts that "inefficiencies of this sort are pervasive in the US health care system"—although, tellingly, it fails to match the parable about clothing with any real examples from health care.

The view that Americans consume too much health care because insurers pay the bills leads to what is currently being called the "consumer-directed" approach to health care reform. The virtues of such an approach are the theme of John Cogan, Glenn Hubbard, and Daniel Kessler's Healthy, Wealthy, and Wise. The main idea is that people should pay more of their medical expenses out of pocket. And the way to reduce public reliance on insurance, reformers from the right wing believe, is to remove the tax advantages that currently favor health insurance over out-of-pocket spending. Indeed, last year Bush's tax reform commission proposed taxing some employment-based health benefits. The administration, recognizing how politically explosive such a move would be, rejected the proposal. Instead of raising taxes on health insurance, the administration has decided to cut taxes on out-of-pocket spending.

Cogan, Hubbard, and Kessler call for making all out-of-pocket medical spending tax-deductible, although tax experts from both parties say that this would present an enforcement nightmare. (Douglas Holtz-Eakin, the former head of the Congressional Budget Office, put it this way: "If you want to have a personal relationship with the IRS do that [i.e., make all medical spending tax deductible] because we are going to have to investigate everybody's home to see if their running shoes are a medical expense.") The administration's proposals so far are more limited, focusing on an expanded system of tax-advantaged health savings accounts. Individuals can shelter part of their income from taxes by depositing it in such accounts, then withdraw money from these accounts to pay medical bills.

What's wrong with consumer-directed health care? One immediate disadvantage is that health savings accounts, whatever their ostensible goals, are yet another tax break for the wealthy, who have already been showered with tax breaks under Bush. The right to pay medical expenses with pre-tax income is worth a lot to high-income individuals who face a marginal income tax rate of 35 percent, but little or nothing to lower-income Americans who face a marginal tax rate of 10 percent or less, and lack the ability to place the maximum allowed amount in their savings accounts.

A deeper disadvantage is that such accounts tend to undermine employment-based health care, because they encourage adverse selection: health savings accounts are attractive to healthier individuals, who will be tempted to opt out of company plans, leaving less healthy individuals behind.

Yet another problem with consumer-directed care is that the evidence says that people don't, in fact, make wise decisions when paying for medical care out of pocket. A classic study by the Rand Corporation found that when people pay medical expenses themselves rather than relying on insurance, they do cut back on their consumption of health care—but that they cut back on valuable as well as questionable medical procedures, showing no ability to set sensible priorities.