American Journal of Law & Medicine

For profit enterprise in health care: can it contribute to health reform? (Follow the Money: The Impact of Economic on the Delivery of Health Care)

I. INTRODUCTION

Since the demise of the last major health reform initiative in 1994, (1) health coverage for the American people has deteriorated. Private insurance costs have risen, and coverage under private insurance became less comprehensive, with higher deductibles and copayments. (2) Many new treatments for serious diseases and associated provider compensation have become more and more unaffordable, even for those with health insurance coverage. (3) Recent reports document the challenges for cancer patients faced with the soaring cost of cancer treatment. (4) Public programs, such as Medicare and Medicaid, have picked up some slack and have grown in numbers. (5) But gaps remain. Approximately 16 percent of the U.S. population is uninsured. (6) Annual U.S. spending for health care was $2 trillion in 2005, and is estimated to reach $4 trillion by 2015. (7) Healthcare's share of the economy has more than doubled over the past 35 years, rising from 7.2 percent of gross domestic product (GDP) in 1970 to 16 percent of GDP in 2005. (8) The Centers for Medicare and Medicaid Services (CMS) estimates that national healthcare spending is expected to reach $4.5 trillion and comprise 19.3 percent of GDP by 2019. (9)

The elephant in the room when it comes to healthcare is its cost. This article analyzes how and why the cost of healthcare services grew in the way they did from the 1930s until today. This article proposes that the inflation in healthcare costs in the United States is due to both factors common to other countries and unique to the United States. The common factors are: (1) advances in medical science and associated technology and pharmaceutical products; and (2) the advent of widespread health insurance coverage. The factor unique to the United States is the large amount of for-profit enterprise in the healthcare sector. The United States is unique in the degree to which healthcare is produced, financed and delivered through for-profit enterprise.

This article analyzes the characteristics and behavior of the major players in the healthcare sector--physicians, hospitals, health insurers and medical product manufacturers--and assesses what characteristics and behavior might be undesirable in a publically-subsidized sector of the national economy. Resolving these issues becomes increasingly important as the nation moves toward health reform and mandated insurance coverage imposing involuntary financial obligations on patients, employees and employers.

II. THE HEALTH INSURANCE CRISIS

This section reviews the reasons for rising health care costs from the s1930s until today. This inflation results from two important factors: (1) the advent of widespread health insurance coverage; and (2) advances in medical science and associated technology and pharmaceutical products.

A. HEALTH INSURANCE IN THE UNITED STATES

Health insurance is a Twentieth Century phenomenon. Early in the century, health insurance as it is known today did not exist. Only "sickness insurance" which paid for loss of income as a result of illness was available. (10) The American healthcare financing system took shape in the mid-Twentieth Century following World War II. Now in the Twenty-First Century, the health insurance system in the United States is crumbling under the weight of the tremendous and increasing cost of health insurance benefits.

Healthcare was not always unaffordable. In the early years of the Twentieth Century, the costs of medical care were lower and a manageable expense for most people. One analyst concluded that, in 1930, "[t]he people of the United States ... are paying for the treatment of disease not less than $2,500,000,000 a year, or ($2,500,000,000/ 120,000,000 population) $20.83 per capita, or approximately $100 per family." (11) Presented in Table 1 are the elements of costs included in this estimate. (12) One dollar in 1930 was worth $11.69 in 2005 dollars, according to the Consumer Price Index. (13) Thus, in 2005 dollars, healthcare expenses in 1930 were $1,169 per capita. Of note, in 2005, per capita healthcare expenditures in the United States were $6,701. (14) How did costs sore from $2.5 billion in 1930 to $ 2 trillion in 2005--a seventy-five year period?

1. Private Health Insurance

Throughout the 1920s and 1930s, healthcare services were becoming more expensive. (15) A private initiative, the Committee on the Cost of Medical Care, examined the forces behind escalating costs with Dr. Ray Lyman Wilber, Secretary of the Interior, serving as chair. (16) The Committee prepared numerous reports and provides the first systematic analysis of the American healthcare sector.

To address risks of undue financial exposure due to medical expenses, many hospitals, physicians and employers explored ways to finance patient healthcare expenses. During this period, various prepaid health plans were sprouting up across the United States. In 1939, the American Hospital Association adopted the Blue Cross symbol to identify plans meeting certain criteria and standards, and franchised health plans as Blue Cross plans meeting these standards. (17) In 1972, the Blue Cross Association separated from the American Hospital Association.

Another model of health plans that evolved in the 1930s and 1940s were panels of doctors. These types of plans were eventually called Blue Shield plans. Like Blue Cross plans, the Blue Shield plans formed their own association, and merged with the Blue Cross Association in 1982. (18)

A third model of health plan evolved in which patients paid a fixed amount for care by an organization. The most famous of these is the Kaiser Permanente plan which evolved from industrial health programs for the workers of Kaiser Industries during the late 1930s and 1940s. (19) The Kaiser plan was later opened to the public in 1945. Other prepaid health plans, later dubbed health maintenance organizations (HMO), have been important models for containing healthcare costs. (20)

By 1940, 10 percent of the U.S. population had health insurance. (21) By 1957, according to the Social Security Administration, 72 percent of the U.S. population had health insurance. (22) During this period, the design of the American health insurance system solidified as a primarily private system through employers with essentially two service benefit plans--one for hospital and extended care facilities, and one for physicians and other providers of outpatient services. This design was based on the Blue Cross and Blue Shield plans which were the dominate private insurance plans of the day. (23) Of interest, Congress later adopted this model for the Medicare program.

In 1974, Congress enacted the Employee Retirement Income Security Act (ERISA). (24) This act placed the regulation of employer-sponsored health insurance--the predominant source of health insurance for the non-elderly -with the federal government. (25) Under the ERISA preemption provisions, (26) employers who are self-insured and fund all the risk in their benefit plans are exempt from state insurance regulation. This division of regulatory authority over health plans has greatly inhibited state efforts to reform and expand health coverage. (27)

During the late 1970s as well as the 1980s, commercial insurance companies entered the health insurance market and targeted employers with healthier work forces. (28) Blue Cross and Blue Shield plans operated as not-for-profit health service plans under state law and had legal obligations such as community rating and mandatory enrollment periods in which they had to accept all comers. (29) Commercial insurers, on the other hand, were able to experience rate and engage in other underwriting practices that enabled them to insure the more desirable risks in terms of health. (30)

To compete, Blue Cross Blue Shield plans abandoned the not-for-profit service benefit plan model, and reorganized themselves as for-profit companies. Before 1986, organizations sponsoring Blue Cross Blue Shield plans were tax exempt under 501(c)(4) as social welfare plans. (31) Congress revoked the exemption in the Tax Reform Act of 1986 for not-for-profit plans that sold insurance with underwriting characteristic of commercial insurers. in order to compete with commercial insurers. (32) In 1994, the Blue Cross Blue Shield Association adopted a policy to permit plans to be for-profit corporations. (33) Of note, the largest insurance company in the nation, Wellpoint, has many subsidiaries that are Blue Cross Blue Shield plans. (34)

2. Public Health Insurance

In 1965, Congress enacted the Medicare and Medicaid programs. (35) In 1972, Congress expanded Medicare coverage to the seriously disabled and to people with End Stage Renal Disease (ESRD). (36) The Medicare program is a social insurance program financed with a combination of payroll taxes for hospital insurance and premiums from Medicare beneficiaries for physician and other outpatient services. (37) Basic Medicare benefits include hospital and extended-care services, (38) as well as physician and other outpatient services on a fee-for-service basis, (39) or as part of a prepaid health plan. (40) In 2003, Congress added a new, optional prescription-drug benefit to the Medicare program. (41)

Medicaid is a welfare program jointly financed and administered by the federal government and the states. (42) Medicaid provides health insurance for some disabled and elderly poor, as well as poor mothers, infants, and children. (43) The Medicaid program provides basic hospital, physician, and long-term care services to eligible individuals. (44) In 1997, Congress enacted the State Children's Health Insurance Program (S-CHIP), extending health coverage to all eligible children. (45)

The cost of the two programs greatly exceeded prior estimates. Immediately upon implementation, the Medicare program generated enormous demand for healthcare services, and thus created sharp and continuing increases in the cost of healthcare. (46) Similarly, Medicaid expenditures rose at unexpected levels, putting great pressure on state budgets. (47) The Medicare and Medicaid programs exacerbated the healthcare cost inflation that the United States had been experiencing since the 1920s.

In 1972, inspired by the experience of private HMOs such as Kaiser Permanente, existing from the 1930s, and responding to a major initiative of the Nixon administration, (48) Congress passed the Federal HMO Act to promote the development of capitated healthcare delivery for the non-elderly population. (49) Since the 1970s, both the Medicare and Medicaid programs have experimented with, and later embraced, prepaid managed care plans for their beneficiaries and recipients, respectively. (50)

Congress enacted Part C of the Medicare Program to include the Medicare+Choice Program in 1997. (51) The Medicare+Choice program did not compete well on costs to beneficiaries compared to fee-for-service Medicare, (52) and thus was not particularly successful. The Medicare Prescription Drug Improvement and Modernization Act of 2003 changed the Medicare+Choice program to the Medicare-Advantage program, and provided additional funding to managed care plans. (53)

Medicaid has been moving to prepaid managed care, particularly for children and pregnant women, since 1981. (54) In 1997, Congress authorized states to serve Medicaid beneficiaries through prepaid managed care plans without getting a waiver of program requirements. (55) Since the 1990s, states have been allowed to use the waiver authority under section 1115 of the Social Security Act (56) to expand coverage in prepaid managed care for low-income uninsureds. (57)

3. Implications of Rising Costs for Public and Private Health Insurance

The rising cost of healthcare expenditures has been problematic for both public and private insurance programs. For public programs, the inflation adds to government budget deficits and threatens economic growth. According to the Congressional Budget Office, under current law, federal spending on Medicare and Medicaid will increase from about 4 percent of GDP in 2009, to nearly 6 percent in 2019, and 12 percent by 2050. (58) These increases will be due primarily to growth in per capita costs rather than from the aging of the population (59)

For private health insurance offered as an employee benefit, threats to actual access to coverage are posed. As costs rise, many employers impose greater cost-sharing on workers, making coverage unaffordable, or just drop employee health insurance coverage altogether. (60) According to the Kaiser Family Foundation, premiums for employer-based health insurance rose by 5 percent in 2008, with greater increases for smaller employers. (61) Further, since 1999, premiums for employer-sponsored health coverage increased 120 percent. (62) The Kaiser Family Foundation reports that health insurance expenses are "the fastest growing cost component for employers" and are likely to "overtake profits by the end of 2008." (63) The decline in the scope and generosity of employer-sponsored coverage is stunning as described by researchers Jonathan Gruber and Robin McKnight:

   But the past two decades have been a period of substantial
   reduction in both the scope and generosity of employer-provided
   health insurance. In 1982, roughly 80% of workers were covered by
   employer-provided health insurance. By 1998, this had fallen to
   73%. Similarly, in 1982, 44% of those who were covered by their
   employer-provided health insurance had insurance that was fully
   financed by their employer. But by 1998, this had fallen to 28%.
   (64)

The situation has deteriorated further. The United States Census reports that the number of the percentage of the population covered by employer-sponsored private health insurance is 59.3 percent in 2007. (65)

Many persons are increasingly vulnerable to financial ruin if they get sick. It is not just over the 15 percent of the U.S. population that is uninsured. (66) Many insured persons find their insurance is inadequate to cover major medical expenditures. (67) A recent poll sponsored by the Kaiser Family Foundation and the Gallup Poll found that 21 percent of American families reported difficulty in paying medical bills. (68) Also, in recent years, the number of consumer bankruptcies associated with medical debt has soured accounting for about 50 percent of consumer bankruptcies. (69) Medical debt also contributes to mortgage defaults and home foreclosures. (70)

The case of cancer care is a dramatic example of the challenges to the institutions of public and private health insurance coverage. …

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