Eliminate the Profit Motive in Health Care

Arnold S. Relman, M.D. Professor Emeritus of Medicine and Social Medicine, Harvard Medical School Former Editor-in-Chief, New England Journal of Medicine

There are two interrelated critical issues in health reform right now: how to extend and improve insurance coverage, and how to control the unsustainable rise in health care expenditures. Virtually all of the current legislative attention is focused on the first issue but, notwithstanding claims to the contrary, none of the proposals now on the table offers any credible solution for the control of rising costs. Without control of health cost inflation, the present system will not be viable much longer.

Expansion of coverage is of course a highly desirable goal, but it inevitably increases expenditures even beyond today's exorbitant levels. President Obama has repeatedly said he would veto any health proposal that is not "budget neutral" over the next decade. The legislation now under consideration claims to meet that requirement through savings promised by the insurance, drug and hospital industries and through reductions in Medicare expenditures (excessive payments to private insurers for Medicare Advantage plans would be a major target), possibly supplemented by taxes on employment-based health plans for high income employees. However, critics question whether these measures would fully pay for the almost one trillion dollars of new costs for covering most of the uninsured over the next decade.

But the estimate of the costs of expanded coverage does not include the cost of the constant inflationary rise in all medical expenditures, lately about 6 - 8 percent per year. This would increase total health spending by roughly another two trillion dollars over the next decade. Administration policy-makers speak hopefully of savings to be generated in the long term by switching to electronic records, using more preventive measures, and applying the information gained from studies of comparative effectiveness. But skeptics might call this "faith-based" savings, because there is no solid evidence to support such hopes. The sobering fact remains that something more must be done soon to slow medical inflation or the entire health system will inevitably slide into bankruptcy. And yet none of the legislation currently being considered addresses that problem. Adding more benefits to the system, and covering more people with public and private insurance, are certainly important, but even if those improvements were paid for, they would not slow down the numerous inflationary forces that make our medical care system unsustainable.

What are those inflationary forces? I believe the most important among them are the incentives in the payment and organization of medical care that cause physicians, hospitals and other medical care facilities to focus at least as much on income and profit as on meeting the needs of patients. I have discussed this subject in a recent book (A Second Opinion. Rescuing America's Health Care. Public Affairs, New York, 2007). The U.S., more than any other advanced country, has come to rely mainly on private markets to deliver medical care, and on fee-for-service to pay its physicians. The incentives in such a system reward and stimulate the delivery of more services. That is why medical expenditures in the U.S. are so much higher than in any other country, and are rising more rapidly. Our business-oriented system inevitably drives up expenditures because in medical care the balancing tensions between the suppliers and consumers of services that constrain costs in ordinary business markets do not exist. Physicians, who supply the services, control most of the decisions to use medical resources, and patients, who are the consumers of those resources, do not pay most of the costs.

The economic incentives in the medical market are attracting the great majority of physicians into specialty practice, and these incentives, combined with the continued introduction of new and more expensive technology, are a major factor in causing inflation of medical expenditures. Physicians and ambulatory care and diagnostic facilities, are largely paid on a piecework basis for each item of service provided. Hospitals also bill insurers according to the days of care and the services they provide, although payments for treatment of an illness may be aggregated. However, all providers compete for income and market share, often advertising and marketing for that purpose. They almost never compete on prices because public and private insurers, not patients, pay most of the costs. Competition in the current medical market therefore tends to drive up total costs because it results in greater use of services, while rarely lowering prices.

Control of medical expenditures is unlikely without a major reform of the payment and organization of medical care. Expanding and improving the medical insurance part of the health system will not solve the expenditures problem unless the perverse incentives in the delivery of care are also corrected. In fact, expansion of insurance benefits without this other reform would probably make matters even worse. A so-called "public option" will not solve this problem either, although its competition might force private insurers to reduce their premiums or increased benefits. But even if some sort of low-cost not-for-profit insurance plan were offered as an optional choice for the uninsured and those dissatisfied with their present coverage, the inflationary effects of fee-for-service payments and an entrepreneurial medical care system would still be operating. After all, Medicare is a low-overhead plan that costs its beneficiaries less than private plans, but the rate of inflation in its expenditures is nearly as rapid as the inflation in private medical insurance expenditures. The benefits of Medicare are just as threatened as those of the private insurance system because costs are rising rapidly in both the public and private sectors of health care.

Judging from the current debate in Washington, there is little evidence that lawmakers are aware of these facts or, if they are, that they have the stomach for resisting the powerful vested interests that stand in the way of major reform. That is why the Goldman Sachs prediction of a compromised legislative outcome is likely to be correct. At the end of this Congress we will probably end up in a position not unlike that facing the Commonwealth of Massachusetts. Over three years ago it enacted legislation that greatly expanded insurance coverage, but from the outset it faced serious financial problems in funding the increased costs. A special state commission has recommended to the Massachusetts legislature that it consider ways to eliminate fee-for-service payment of physicians in favor of some type of system that would be based on organizations of physicians and hospitals that could accept global prepayments for comprehensive care. It remains to be seen whether and how these recommendations can be implemented, but it is telling that Massachusetts seems now to realize what our national lawmakers have not yet grasped: Sustainable universal, or near-universal, coverage requires more than fixing the insurance system. It needs major reform in the payment and organization of medical care as well.

In my book, and in a recent article in the New York Review of Books (July 2), I have proposed a system of medical reforms that would deal with the cost problems in both the insurance and medical care sectors of our health care system and would ensure good care for everyone. I recommend replacement of the current mix of public and private insurance plans with universal coverage for comprehensive care that would be funded by a progressive national health insurance tax. Medical care would be provided through community-based not-for-profit multi-specialty group practices, which would be staffed by salaried physicians. When medical insurance is no longer a for-profit business, when physicians no longer are paid on a fee-for-service basis, and when the entire health care delivery system is not-for-profit, economic incentives to over- or underserve the needs of patients can be eliminated by appropriate regulation and we can expect improved quality of care at lower costs. The total national expenditure on medical care can be controlled by the level of national funding, while decisions about the proper use of medical resources can be safely left where they belong, in the hands of physicians and their patients.

Carrying out such a transformation of the health care system would of course be a formidable task, probably achievable only in gradual steps. It would require a sea change in the current political climate. A large part of the public, supported by most business leaders who are outside the medical-industrial complex, and by an awakened medical profession, would have to be convinced that a major reform of this kind offers the only chance for an equitable but affordable medical care system of good quality. In a just-published commentary in the New England Journal of Medicine ("Doctors as the Key to Health Care Reform", NEJM, September 24, 2009) I explain how crucial change in the organization and payment of medical services is to achieving a sustainable health care system. The medical profession will have to be a willing and active partner in carrying out these reforms.

Lawmakers need votes and public support even more than the money from vested interests, so they probably would act if a majority of voters were to make its wishes clear and if the medical profession were part of this awakening. But before public opinion can be galvanized to demand a sweeping change of this kind we may, unfortunately, have to experience a disastrous financial collapse of the health care system, with widespread loss of benefits. An expansion of coverage without changing the medical care delivery system and controlling medical inflation, might very well hasten such a collapse.