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Title: HEALTH CARE REFORM
Subtitle:
Report No.: GAO/OCG-93-8TR Date: December 1992
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Author: United States General Accounting Office
Office of the Comptroller General
Addressee: Transition Series
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CONTENTS
Health Care Reform
Access to Health Insurance for the Uninsured
Private Health Insurance Market Reforms
Health Care Cost Containment
Administrative Simplification
Fraud and Abuse Controls
Diffusion and Pricing of New Medical Technologies
Medical Malpractice Reform
Observations About Health Care Reform
Related GAO Products
- Alternative Health Care Systems
- Health Care Costs
- Health Insurance
- Fraud and Abuse
- Medical Malpractice
Transition Series
- Economics
- Management
- Program Areas
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Office of the Comptroller General
Washington, DC 20548
December 1992
The Speaker of the House of Representatives
The Majority Leader of the Senate
In response to your request, this transition series report discusses major
policy, management, and program issues facing the Congress and the new
administration in the area of health care reform. The issues include (1)
access to health insurance for the uninsured, (2) private health insurance
market reforms, (3) health care cost containment, (4) administrative
simplification, (5) fraud and abuse controls, (6) diffusion and pricing of new
medical technologies, and (7) medical malpractice reform.
As part of our high-risk series on program areas vulnerable to waste, fraud,
abuse, and mismanagement, we are issuing a related report, _Medicare Claims_
(GAO/HR-93-6, Dec. 1992).
The GAO products upon which this transition series report is based are listed
at the end of this report.
We are also sending copies of this report to the President-elect, the
Republican leadership of the Congress, the appropriate congressional
committees, and the Secretary-designate of the Department of Health and Human
Services.
HEALTH CARE REFORM
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A key challenge facing the new Congress and administration is finding a better
way to manage and finance the U.S. health care system while preserving the
high-quality, innovative medical care the United States has achieved. The
United States is projected to spend 18 percent of its gross domestic product
(GDP) on health care by the year 2000---far more than any other industrialized
country. These growing costs are being shared by individuals and the business
community as well as federal and state programs. The inexorable rise in health
care costs is constraining wage increases and the financial capability of
federal and state governments to address other pressing social concerns. We
have emphasized that failure to control overall health care costs will stymie
efforts to control outlays on Medicare and Medicaid--the fastest growing major
programs in the federal budget--and will make it more difficult, if not
impossible, to bring the federal budget into balance. [ Footnote 1: See
particularly app. III in _Budget Deficit: Appendixes on Outlook, Implications,
and Choices_ (GAO/OCG-90-5A, Sept. 28, 1990). ] Individuals, business, and
the government need to work together to tame the cost spiral for health care.
Despite having the highest costs in the industrialized world, our health care
system is not serving large portions of our population very well. Nearly 34
million Americans are uninsured and millions more are underinsured or fear
they might lose coverage if they develop a serious medical condition, lose
their job, or change employers.
The Congress has asked us to review approaches developed in American
communities and foreign countries that might help explain the root causes of
our health care problems and suggest possible solutions. We have examined the
experiences of Canada, France, Germany, and Japan as well as U.S. federal
programs and state and community initiatives. If the United States is to
broaden access and contain health spending, there is a need to consider
adopting features common to successful systems that we have observed in other
countries and within our own borders.
A reformed U.S. system must also build on the strengths of the nation's
current health care system. A strong research establishment, the continuing
development of technology, and the capacity to evolve more efficient service
delivery mechanisms are among the strengths of the U.S. health care system
that should be preserved.
ACCESS TO HEALTH INSURANCE FOR THE UNINSURED
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Universal access to health insurance is an achievable goal. Countries like
Canada, France, and Germany provide high-quality health care to all their
citizens, yet spend a considerably smaller share of their nations' resources
on health. Within our own borders, Hawaii is the state with the largest share
of its population covered by health insurance. Rochester, New York, counts 7.1
percent of its population under the age of 65 as uninsured compared with a
national average of about 15 percent. Yet both Hawaii and Rochester have
achieved enviable records in terms of health cost containment and the level of
insurance premiums.
Universal access to health insurance is not free. Estimates for providing the
34 million persons who are uninsured with health insurance range from $12
billion to $27 billion annually. These costs are not the only factor that has
made it difficult to achieve universal access to health insurance in the
United States. Universal access would also entail major changes in the role of
government, the structure of the health finance system, and the financial
responsibilities of individuals and employers. An employer mandate would
compel businesses to provide or finance insurance for their employees and may
add new costs and responsibilities for many small firms. A Canadian-style
system would involve a substantial increase in the share of health care costs
financed through the tax mechanism.
The United States is considering a commitment to universal coverage not only
because of the needs of the 34 million uninsured but also because such
coverage can contribute to both short- and long-term strategies for cost
containment. Universal coverage contributes to lowering administrative costs
for providers by relieving them of the burden of assessing insurance status
before treatment and by limiting losses associated with bad debt. Changes in
these two areas would be especially beneficial for institutions such as
teaching hospitals and public hospitals in large cities that currently serve
large numbers of uninsured patients. Universal coverage also contributes to
system efficiency by reducing the need for the uninsured to use more expensive
treatment settings such as the hospital emergency room because they are not
covered for treatment in less expensive settings. Moreover, adequate coverage
for preventive and primary care for chronic conditions can help avoid more
costly and serious treatments in the future.
Universal health insurance coverage is not ensured in all of the comprehensive
reform proposals, although all proposals seek to make significant inroads to
reducing the uninsured population. National health insurance plans that cover
all citizens explicitly solve the problem of the uninsured. Proposals that
rely on the existing employer-based insurance model require development of
complementary programs to cover the uninsured who are not employed and any
employed persons or family members who remain uninsured under the
employer-based plans.
For example, Hawaii's mandate that employers provide insurance coverage does
not require that health insurance coverage be provided to part-time workers or
to family members of insured workers. To address these gaps in coverage and to
include the unemployed who are not eligible for Medicaid, Hawaii developed a
supplemental state-sponsored insurance plan to extend coverage to these
groups. The state estimates that it has reduced the number of uninsured to
about 2 percent of its population.
PRIVATE HEALTH INSURANCE MARKET REFORMS
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About three-fourths of uninsured Americans are workers or their dependents,
and just over one-half of uninsured workers are employed by firms with fewer
than 25 employees. Some underwriting and rating practices in the private
insurance industry have made obtaining affordable health insurance difficult
or impossible under several conditions: when an insured worker, dependent
family member, or coworker in the same risk pool develops an expensive medical
condition; when a worker changes jobs; or when a firm changes insurance
carriers. If comprehensive reform is based on the current employer-based
private insurance system, reforms of insurance practices that affect people in
these situations are essential.
Two broad types of health insurance reforms would be needed--those designed to
improve availability and those designed to improve affordability. Reforms
related to availability guarantee that insurance will be available to all
eligible members of employee groups through
-- _guaranteed issue_ of policies to all employer groups and their eligible
members,
-- _guaranteed renewal_ of policies that eliminate or restrict the capacity of
insurers to cancel policies because of medical history or to introduce new
policy exclusions at the time of renewal, and
-- _guaranteed continuity of coverage_ when employers change insurers,
employees change jobs, or insurers become insolvent or discontinue offering
health insurance.
Because insurance may be available but still priced out of the reach of small
businesses, affordability also needs to be addressed through
-- restricting factors used in setting rates, such as health status and
previous claims experience, and
-- limiting the range of premiums a single insurer can charge for customers
with different risk characteristics.
These types of reforms are needed to ensure that private insurance products
are available to everyone under employer-mandated coverage plans. However,
such reforms can be a double-edged sword. While they would increase
availability and reduce insurance premiums for higher-risk groups that have
been excluded from the market, the reforms would generate higher premiums for
those currently insured in lower-risk groups who would share in the costs of
the extended coverage.
The net effect of insurance market reforms alone on reducing the ranks of the
uninsured is unclear. States have introduced a number of these reforms in the
last few years. Early experience suggests that such reforms have had a modest
effect on reducing the ranks of the uninsured when coupled with limited
subsidy programs and state assistance to risk pooling.
HEALTH CARE COST CONTAINMENT
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The call for control of health care costs is now heard throughout U.S.
society. Expanding insurance coverage to the uninsured would make cost control
more urgent, but even without that additional spending, the upward sweep of
health care costs is threatening the financial position of businesses,
individuals, and governments.
Cost control entails some force that disciplines the decisions of consumers
and providers. As a result, cost control means that some segments of society
will receive less. Providers (such as physicians and hospitals) will have
lower revenues than if present trends continue. Consumers may face less choice
among providers, and the rate of improvement in medical technology may slow.
Nonetheless, cost control is imperative. Without it, the problem of the
uninsured will likely worsen as the unchecked rise in the cost of insurance
puts it out of the reach of more and more people. Moreover, lack of cost
control will aggravate the budgetary squeeze on the federal and state
governments. How to control costs with the fewest adverse effects on the
population is the challenge.
Among the many proposals for achieving cost discipline in U.S. health care,
two broad strategies are currently most prominent: managed competition and
direct controls. Both would use government regulation, although in quite
different ways. The two strategies differ in the extent to which they rely on
market forces and in the extent to which they have been tested in practice.
Managed competition would give regulation a competition-enhancing slant by
establishing a complex set of rules within which competition can occur. After
restructuring the marketplace, the government would play umpire for insurers,
providers, and beneficiaries while letting competition exert discipline and
rein in health care costs. The second strategy, direct controls, would require
public (or quasi-public) authorities to set health care prices, limit overall
spending, and regulate the spread of new technology.
The strategy of managed competition is evolving, and its various proponents
sometimes define it in different ways. Nonetheless, they agree on blending
federal regulation with incentives and private initiative to create a
cost-conscious discipline for hospitals and physicians. Also, current
proposals assume heavy reliance on managed care health plans, such as health
maintenance organizations (HMO) and preferred provider organizations (PPO),
that try to encourage efficiency by placing providers at risk for health
costs, using administrative processes to attempt to control services, or both.
In designing a practical system of managed competition, two questions are
pivotal:
-- First, can rates for health care plans be set so that insurers are not
rewarded for "cream-skimming"?
Under current arrangements, a company offering health insurance makes more
money by attracting people who are healthier than average and by not insuring
bad health risks. Whether a system of managed competition could prevent
cream-skimming--which would undermine the system--is much debated. Our work on
Medicare's rate-setting for HMOs illustrates the difficulty of the task.
-- Second, would managed competition achieve cost savings at the expense of
quality?
To prevent this, the proponents of managed competition stress the need to
create new sources of information about the quality of health care. How
quickly such information could be generated and how consumers would use it
are, however, open questions. Our work on HMOs for Medicare enrollees shows
that quality assurance is needed to avoid abuses due to cost-cutting.
The strategy of managed competition is appealing to many. The Netherlands, for
example, is in the early stages of implementing a particular version of the
strategy. But evaluating the likely effectiveness of managed competition is
hampered by lack of a real test, abroad or within an American state, in which
a system of managed competition could be observed. Some research on states
with relatively strong competition among HMOs and other managed care providers
is mildly encouraging. Nonetheless, these states have not implemented managed
competition, so it is difficult to draw conclusions from them about how much a
managed competition system would flatten the trend in costs.
The alternative approach, direct controls, uses fee schedules and other price
controls, spending targets and caps (sometimes called "global budgets"), and
controls on the dispersal of new technology. Our analysis of these controls
also reveals both strengths and weaknesses.
Direct controls have been employed in many different settings and have been
implemented in a variety of ways. For example, direct controls are used
systemwide in countries with many insurers (such as Germany) and with a single
insurer (Canada). In the United States, direct controls are used at the
federal level (Medicare uses a fee schedule and has introduced a spending
target for physicians' services), at the state level (Maryland sets hospital
rates), and at the local level (Rochester, New York, has used global budgets
for hospitals).
In addition, direct controls have, with different degrees of success,
restrained health care costs. Our studies of American and foreign health care
provide evidence on the effectiveness, in particular, of spending controls and
price controls. Thus, we found that the cost containment strategy used in
Rochester, New York--which included global budgets--seemed to have slowed the
rise in hospital costs. For France and Germany, our analysis showed that
targets and caps slowed the rate of spending increases compared with what
would have happened without these policies. Our analysis also confirmed that
the strength of enforcement is important: In Germany, spending caps have
replaced targets, which were more weakly enforced, and the caps have proved
more effective in limiting spending.
Direct controls on prices also have been relatively effective in containing
costs. As our analysis showed, U.S. states that have set rates for hospital
services to which all insurers in the state must adhere have slowed the growth
in their per capita health spending. In addition, Medicare, which uses a
variant of price controls in reimbursing hospitals, has slowed the rise in its
costs for hospital services. Other countries' experience with price controls
is generally consistent with these findings for the United States.
Direct controls are not a panacea, however. Even viewed just in terms of cost
containment, they do not eliminate all spending pressures. Moreover, direct
controls can hamper efficiency and retard innovation. Budgeting procedures may
not reward efficient providers and insurers and may not penalize inefficient
ones. Spending caps and targets may freeze the prevailing system of delivering
health care and discourage innovations like managed care. Budgets may adapt
too slowly to changes in technology, the demographic mix of patients, and
methods of delivering care. Price controls can slow or block a needed shift of
resources, say from one specialty to another, when demand or supply conditions
change. To some extent these difficulties can be mitigated, but still they
must be weighed when the choice of a spending control strategy is made.
In sum, neither managed competition nor direct controls is without drawbacks.
Indeed, some analysts and policymakers are crafting proposals that combine the
market-oriented advantages of managed competition with the extra cost
discipline of direct controls--specifically, a cap on overall health spending.
These hybrid plans are too sketchy as yet for observers to determine whether
the two strategies can be blended, or how effective such a hybrid system might
be.
In the United States, nearly 6 percent of total health expenditures in 1989
were accounted for by the administration of government health programs and
private insurers. In sharp contrast, Canada spends about one-fifth as much
proportionately on these insurance overhead functions. In addition, U.S.
providers spend billions of dollars each year for billing and other
administrative activities directly attributable to our system of financing
health care. Providers in Canada, Germany, France, and Japan incur lower
costs, in part because they deal with a more unified payment mechanism. While
considerable debate continues about the precise magnitude of the potential
savings in administrative overhead and providers' administrative burdens
associated with specific reform proposals, there is general agreement that
significant savings can be achieved in this area.
Administrative expenses for private insurance plans average about 12 percent,
but they can be as high as 40 percent of claims costs for individual and small
group plans. When multiple insurers market a range of plans differing in scope
of coverage, the result is significant overhead costs to cover claims
processing and marketing. While a wide range of insurers and plans may create
greater consumer choice and greater responsiveness to consumers' needs, this
wide range is part of the reason for higher administrative costs. Physicians,
hospitals, and other providers must expend resources on billing and
administrative procedures to deal with the fragmented payment system.
Almost all reform proposals attempt to achieve cost savings by reducing
administrative costs through one or more of the following approaches:
-- combining large numbers of employers into large insurance-buying
cooperatives to achieve administrative economies,
-- defining a single or limited number of basic insurance plans to reduce
marketing costs and the burden on providers,
-- developing standardized claims forms and billing procedures for all
insurance plans and providers,
-- eliminating insurance underwriting activities,
-- eliminating deductibles and copayments to eliminate the need for providers
to issue bills,
-- using more inclusive methods for reimbursing providers, such as global
budgets, and
-- using a single payer with uniform payment rules and procedures in each
market area.
Canada, for example, achieves substantial administrative savings through a
combination of a single payer with uniform payment rules and elimination of
all deductibles and copayments. The United States might achieve a similar
level of administrative savings if it adopted a Canadian-type reform, but the
savings could be largely offset by the additional use of services associated
with the elimination of deductibles and copayments. Alternatively, the United
States could retain deductibles, copayments, and utilization review
activities. This approach would reduce potential administrative savings but
result in greater control over potential costs associated with increased use
of health services. If the United States should choose a system that depends
on employer-based private insurance, some level of administrative savings
could still be achieved through a combination of the other approaches
described above.
FRAUD AND ABUSE CONTROLS
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The United States may want to invest more, rather than less, in the
administrative resources required for detection of fraudulent and abusive
practices by health care providers. Estimates vary widely on the losses
resulting from fraud and abuse, but the most common is about 10 percent of
total health care spending or about $80 billion annually. Only a token amount
of administrative resources are devoted to detection and elimination of
fraudulent and abusive practices.
Both public and private health insurance programs are subject to fraud and
abuse but separately appear unable to combat it successfully. Our work
suggests that fraud and abuse may be even more prevalent in privately insured
programs, in which control efforts have not been as prominent and data systems
are more fragmented. Indeed, federal health care programs have taken the
leadership role in prevention of such practices. While a simpler and more
uniform payment and administrative system may make it easier to detect
potential fraud and abuse, we believe that investing the needed resources in
designing the administrative structure and continuing surveillance to limit
the potential for such practices is essential. These issues are discussed more
fully in our related report, _Medicare Claims_ (GAO/HR-93-6, Dec. 1992).
DIFFUSION AND PRICING OF NEW MEDICAL TECHNOLOGIES
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The rapid spread and increased use of new medical technologies has been
relatively unrestrained in recent years and has given health spending added
momentum. Technological advances have sometimes led hospitals to participate
in a medical "arms race," as they acquire expensive technology and seek to
keep patients and doctors from shifting to rival hospitals.
Once declared eligible for reimbursement, third-party payers--business,
government, and private insurers--have primarily shouldered the financial
burden of these technological advances. However, insurers' payment policies
have not always encouraged efficient and prudent use of these medical
services. Instead, insurers have left themselves vulnerable to excessive
spending by giving providers incentives to be wasteful or abusive in offering
medical services. In particular, our work has shown that in some cases,
insurers have not adjusted payment rates to reflect the effect of maturing
technology on costs.
The challenge for policymakers is to find ways to encourage development of new
technologies while ensuring their efficient use. This can be accomplished
through payment policies that reflect the costs incurred by high-volume,
efficient providers.
MEDICAL MALPRACTICE REFORM
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Savings in addition to those stemming from comprehensive health care reform
can be achieved through fundamental changes in the U.S. medical malpractice
system. The United States faces higher costs for medical malpractice insurance
and associated defensive medicine costs than other nations.
U.S. medical malpractice premiums are estimated to be only about 1 percent of
total U.S. health care costs. There is considerably wider variation in
estimates of the potential additional costs of defensive medicine--diagnostic
tests and procedures performed solely to protect physicians in the event a
malpractice claim is filed. The American Medical Association estimated the
costs of defensive medicine at $20 billion in 1991. Moreover, physicians want
relief, not only from the financial burdens of malpractice, but also from its
emotional burdens.
Cost reduction should not be the sole basis for malpractice reform.
Malpractice reform also should be directed toward providing better access to
compensation for those who are injured. Arbitration and no-fault programs have
been implemented in various states as an alternative to a complex and
expensive court process. Many of these programs also incorporate local
practice guidelines that, although not an absolute defense, provide evidence
in a judicial process that accepted medical protocols were followed.
Furthermore, hospitals and other medical settings are adopting risk-management
programs that are expected to improve the quality of care. We believe these
efforts should continue to be studied and, when positive effects are
demonstrated, should be considered in conjunction with comprehensive health
care reform.
OBSERVATIONS ABOUT HEALTH CARE REFORM
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Reform of U.S. financing of health insurance and payment of health care
providers is a daunting task. U.S. health care is an $800 billion enterprise
that is diverse, complicated, and dynamic. Achieving reform will be
particularly difficult because, to many people, reform seems to threaten a
good situation. People whose health insurance is adequate and whose health
care is good may fear that reform will result in diminished care or higher
costs for them. For providers as well as consumers, reform of the health care
marketplace will cause a considerable reshuffling and generate losers as well
as winners.
Moreover, reform will not produce a structure that is perfect. Our reviews of
the health systems of other countries shows that after putting major reforms
in place, these countries continue to seek ways to improve their systems. We
believe that the imperfections of any reform--and the dynamic character of the
health care industry--make a stream of further changes inevitable in the years
ahead. However, there may be greater risks in not undertaking comprehensive
health care reform. Without reform, costs will continue to escalate while a
substantial number of Americans lack access to health insurance.
