The writing of this paper was funded by The Urban Institute. It draws on practical experience in state insurance regulation (R.B.), as well as on numerous research projects in private and public financing for medical services, both in the U.S. (R.B., C.G., C.C.) and overseas (C.G.). The support of many funders for these projects is gratefully acknowledged, but the authors remain solely responsible for the content of this paper. The paper’s conclusions and opinions do not necessarily reflect anyone else’s views, including other staff members of the Urban Institute or the World Bank, their officers, trustees, and advisory groups, or any organizations that provide financial support. The authors thank Eileen Nowacki for her data input and other support and Ella Hornsby for additional assistance.Google Scholar

The phrase comes from Enthoven, Alain C. and Kronick, Richard, “A Consumer-Choice Health Plan for the 1990s: Universal Health Insurance in a System Designed to Promote Quality and Economy, I.” New England Journal of Medicine 325 (1989):854–59 (first of two parts).Google Scholar

Even with heavy use of endnotes, not all points can be referenced, and not all good references can be cited. General accounts not always cited but probably of most interest to readers include: Califano, Joseph A. Jr., America's Health Care Revolution: Who Lives? Who Dies? Who Pays? New York: Random House, 1986, especially chapter 3, pp.36–57 (most readable, if poorly documented overview); Congressional Research Service, Health Insurance and the Uninsured: Background Data and Analysis (Washington, DC: U.S. Government Printing Office, May, 1988a, Committee Print, Educ. and Labor Serial No. 100-Z, Energy and Commerce 100-X, Special Comm. on Aging, 100-I) (description and data); Iglehart, John K., “The American Health Care System,” New England Journal of Medicine 326(1992):962-67, 1467-72, 1715-20 (three-part series); Paul Starr, The Social Transformation of American Medicine (New York: Basic Books, 1982) (classic historical-political analysis of medical profession); and Wilson, Florence A. and Neuhauser, Duncan, Health Services in the United States (Cambridge, MA: Ballinger Publishing Co., 1982, 2d ed.) (descriptive overview of delivery and financing, as well as public health and regulation).Google ScholarPubMed

On the early limits of medicine, see, e.g., Thomas, Lewis, The Youngest Science: Notes of a Medicine Watcher (New York: Viking, 1983) and Shorter, Edward, The Health Century (New York: Doubleday, 1987). On hospitals see, e.g., Stevens, Rosemary, In Sickness and in Wealth: American Hospitals in the Twentieth Century (New York: Basic Books 1989). Harvard Professor L. Henderson is the source of the contemporaneous quotation, calling the year 1912 “a Great Divide,” according to Richard Harris, A Sacred Trust (New York: New American Library, 1966), 5.Google Scholar

See, e.g., Mehr, R.I., Fundamentals of Insurance, (Homewood, IL: Irwin, Richard N., 1986).Google Scholar

On foreign developments, see, e.g., Iglehart, John K., “Germany's Health Care System,” New England Journal of Medicine 324 (1991):1750–56; Schieber, George J., Poullier, Jean-Pierre and Greenwald, Leslie M., “Health Care Systems in Twenty-Four Countries,” Health Affairs 10 (1991):22-38. On the U.S., see, e.g., Hirschfield, Daniel, The Lost Reform (Cambridge, MA: Harvard University Press, 1970).Google Scholar

All such early figures come from Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970 (Washington, DC: U.S. Govt. Printing Office, 1975).Google Scholar

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On the Blues, see generally Anderson, Odin W., Blue Cross Since 1929 (Cambridge, MA: Ballinger Publishing Co., 1975); Eilers, Robert D., Regulation of Blue Cross and Blue Shield Plans (Homewood, IL: Richard D. Irwin, 1963); Sylvia Law, Blue Cross: What Went Wrong? (2d ed.) (New Haven: Yale University Press, 1976); Starr, supra note 2.Google Scholar

Bureau of the Census, supra note 6, at 74–75 (price indices were created only for 1935 and subsequent years).Google Scholar

For a descriptive analysis, see Craig, Victoria C., Federal Tax Policy: Its Effect on Health Care Costs, Coverage and the Uninsured (Alexandria, VA: Council for Affordable Health Insurance, October 1992). Not only was fringe-benefit insurance untaxed, but out-of-pocket spending was also deductible for individual taxpayers whose expenses exceeded a threshold (deductibility has been restricted over time). For the theory of economic effects, see Pauly, Mark V., “Taxation, Health Insurance, and Market Failure,” Journal of Economic Literature 24(1986):629-675.Google Scholar

See, e.g., Bovbjerg, Randall R., “Insuring the Uninsured through Private Action: Ideas and Initiatives,” Inquiry 23 (Winter 1986):403–418.Google Scholar

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On NHI in this era, see, e.g., Marmor, Theodore R., Feder, Judith and Holahan, John, “Introduction,” in National Health Insurance: Conflicting Goals and Policy Choices, Feder, Judith, Holahan, John and Marmor, Theodore R. (eds.) (Washington, DC: Urban Institute Press, 1981). On insurance market shares, see the annual HIAA Source Book, cited in Table 2.Google Scholar

On experience rating and Blues versus commercial practice, see generally Starr, supra note 2; Congressional Research Service, supra note 2; and Fox, Daniel M., Rosner, David and Stevens, Rosemary A. (eds.), Between Public and Private: A Half Century of Blue Cross and Blue Shield in New York, Journal of Health Politics, Policy and Law, 16 (1991):64l–805 (symposium issue). Of course, high costs of a Blues plan can also be due to poor performance or unduly generous payments to providers.Google Scholar

On public coverage, see, e.g., Marmor, Theodore R. with Marmor, Jan S., The Politics of Medicare (Chicago, IL: Aldine Publishing Co., 1973), pp.9–38; Rosemary Stevens and Robert Stevens, “Medicaid: Anatomy of a Dilemma,” Law and Contemporary Problems 35 (1970):348-425.Google Scholar

See Appendix Table 1 for the precise dollar breakdowns of spending that underlie Figure 1-a's percentages.Google Scholar

Bureau of the Census, supra note 6, page 81.Google Scholar

See, e.g., Marmor with Marmor, supra note 15, at 39-57; Feingold, Eugene, Medicare: Policy and Politics, A Case Study and Policy Analysis (San Francisco, CA: Chandler Publishing Co. 1966); American Medical Association, The Case Against the King-Anderson Bill (H.R. 3920): AMA Statement before the Committee on Ways and Means, House of Representatives, 88th Congress (Nov. 21) (Chicago, IL: American Medical Association, 1963).Google Scholar

Part A was funded by dedicated federal taxation; Part B by enrollees' voluntary “premium” payments (which have never covered much of the cost) plus general federal revenues.Google Scholar

For a recent source on Medicare, see Iglehart, John K., “The American Health Care System—Medicare,” New England Journal of Medicine 326 (1992):1467–72; on Medicaid, see Congressional Research Service, Medicaid Source Book: Background Data and Analysis [Committee Print 100–AA, 100th Congress, 2d Session], (Washington, DC: U.S. Government Printing Office, November 1988).Google Scholar

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See, e.g., Feder, Judith et al. (eds.), supra note 13, especially the chapters on provider payment. With regard to the analogy of reimbursed transportation, note that even the choice of walking, taking a taxi, or renting a car is in fact affected by the reimbursement rules, as all business travelers know. And taxis often cost more near hotels in recognition of the availability of this third party payment mechanism.Google Scholar

ProfessorReinhardt, Uwe E., a Princeton economist, frequently uses this slight exaggeration to good effect in his speeches.Google Scholar

For a dicussion of CPR, see, e.g., Holahan, John, “Physician Reimbursement” 73–128 in Feder, et al. (eds.), supra note 13; on various alternatives, see generally Glaser, William A., Paying the Doctor (Baltimore: Johns Hopkins University Press, 1970).Google Scholar

At any given time, patients and providers have an incentive to use medical care up to the point at which its marginal value equals the patient's payment; the decision-making individuals have no accountability for the resulting social costs. These points were not commonly recognized prior to the 1970s, though they now seem commonplace, having been made from various perspectives. See, e.g., Fuchs, Victor R., Who Shall Live? Health, Economics, and Social Choice. (New York: Basic Books, 1974); Hiatt, Howard H., “Protecting the Medical ‘Commons’—Who Has the Responsibility?” New England Journal of Medicine 293( 1975):235-241; Havighurst, Clark C. and Blumstein, James F., “Coping with Quality/Cost Trade-Offs in Medical Care: The Role of PSROs,” Northwestern University Law Review 70( 1975):6-68. The leading empirical estimate is that a fully insured population costs about 40–50% more than one with a high deductible, Manning, Willard G. et al., “Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment,” American Economic Review 77( 1987):251-277. Insurance coverage is not the only determinant of spending, however; medical capabilities (often called “technology” but not limited to machines), population demographics, broader economic trends, and consumer preferences also matter. It is notable, for instance, that in the 1960s, health spending also grew rapidly as a share of total economies in other developed countries, with very different financing (Appendix Table 2). Newhouse, supra Table 1, suggests that growth over time relates more to other factors than to insurance.Google Scholar

Sloan, Frank A., Blumstein, James F. and Perrin, James M. (eds.), Cost, Quality, and Equity in Health Care: New Roles for Health Planning in a Competitive Environment (San Francisco, CA: Jossey-Bass, 1988), especially in chapter 3, summarize the evidence on planning's performance, as seen in the mid-1980s after over a decade's experience. It is worth noting that in other regulated industries, such as electric power and telephone, when prices are set on a cost-plus or rate-of-return basis, utilities respond by investing in capital, which raises fixed costs and allows them to argue for higher prices.Google Scholar

For fuller coverage of this era, see Falk, I.S., “National Health Insurance: A Review of Policies and Proposals,” Law and Contemporary Problems 35 (1970):667–696; Kennedy, Edward M., In Critical Condition: The Crisis in America's Health Care (New York: Simon and Schuster, 1972); Fuchs, Victor R., “National Health Insurance Revisited,” Health Affairs 10 (1991):7-17; Marmor, T.R., Boyer, Richard and Greenberg, Julie, “Medical Care and Procompetitive Reform,” Vanderbilt Law Review 34 (1981):1003-28 (this entire issue, pp. 349-1158, is devoted to “procompetitive” ideas of the late '70s and early '80s).Google Scholar

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On these developments, see, e.g., Ginsburg, Paul B., “Inflation and the Economic Stabilization Program,” 31–51 in Zubkoff, Michael (ed.), Health: A Victim or Cause of Inflation? (New York: the Milbank Memorial Fund, 1976).Google Scholar

For one summary, see Brown, Lawrence D., “Introduction to a Decade of Transition,” Journal of Health Politics, Policy and Law 11(1986):569–583 (covering 1972–1986).CrossRefGoogle Scholar

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On rate setting, see, e.g., Eby, Charles L. and Cohodes, Donald R., “What Do We Know about Rate-Setting?” Journal of Health Politics, Policy and Law 10(1985):299–327; on competitive approaches, Christianson, Jon B., Hillman, D.G. and Smith, K.R., “The Arizona Experiment: Competitive Bidding for Indigent Medical Care,” Health Affairs (Fall 1986):88–103; Melnick, Glenn, Zwanziger, Jack and Bradley, Tom, “Competition and Cost Containment in California,” Health Affairs 8 (Summer 1989):129-136.Google Scholar

On benefits in the 1980s, see generally Chollet, Deborah J., Employer-Provided Health Benefits (Washington, DC: Employee Benefit Research Institute, 1984). On “competitive” developments, see, e.g., Congressional Research Service, supra note 2, especially pp. 121–166 (overview); Califano, supra note 2 (pro-private, competitive approach); Reinhardt Peter Nippert, “Competition in Health Care Delivery of the U.S.: Panacea or Poison? A Critical View,” Health Policy 20(1992):301-308 (critique).Google Scholar

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The year 1980 was the peak year for coverage, with declines ever since, according to HIAA data not presented. Table 2 shows a drop of about 10% since then, but it is not possible to be precise about the drop, because the HIAA changed the way that they report coverage in 1986, omitting people who bought “indemnity” coverage (Table 2 note). Including them would have raised the totals by some amount, depending upon how many of the indemnity policies duplicated other policies.Google Scholar

The drop shown is from 72.7% to 68.2% for private coverage only; combined public-plus-private coverage dropped from 3.7% to 3.3%. However, the 1980 figures are known to understate coverage because of the way the survey questions were asked, especially about coverage of children. Improved surveying raised the private-only percentage for 1991 from 68.2 to 69.6, and the public-private from 3.3 to 4.2. Table 4 intentionally understates the extent of 1990 coverage to keep the data consistent with 1980; the 5-point drop still holds true, assuming that the under-reporting of coverage was similar in 1980.Google Scholar

See generally Moon, Marilyn, Medicare Now and in the Future (Washington, DC: Urban Institute Press, 1993) (chapter 5, pp.106–137, covers the catastrophic experience).Google Scholar

See generally Chollet, supra note 35; Congressional Research Service, supra note 2; Kosterlitz, Julie, “Unrisky Business,” National Journal (April 6, 1991):794-797; Levit, Katharine R., Olin, Gary L. and Letsch, Suzanne W., “Americans' Health Insurance Coverage, 1980–91,” Health Care Financing Review 14(1992):31–57 (no.1). Enthoven, Alain C., with characteristic verve, complains on behalf of the “pseudo insured, that is, with insurance that won't be there when they need it….” Committee on Labor and Human Resources, U.S. Senate Achieving Effective Cost Control in Comprehensive Health Care Reform (Washington, DC: U.S. Government Printing Office, 1992, 102d Congress, 2d Session, S.Hrg. 102-955, Dec 16 & 17), page 33.Google Scholar

The CPI-medical index is not perfect, as it does not adjust for changes in the mix and quality of services over time, nor for prices actually paid rather than quoted by providers. See, e.g., Newhouse, supra Table 1, pp. 10–11. It somewhat overstates the extent of inflation, especially in recent years. No better data are available, however.Google Scholar

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Other reasons for feeling that the U.S. could spend less include research on cost sharing, see, e.g., Manning, et al., supra note 26; “small area variation” studies finding much lower usage in some places than others, e.g., Wennberg, John E., “Dealing with Medical Practice Variations: A Proposal for Action,” Health Affairs (Summer 1984):6-32; and judgmental reviews of the appropriateness of certain procedures, e.g., Chassin, M. et al., “Does Inappropriate Use Explain Geographic Variations in the Use of Health Care Services?” JAMA 258(1987):1–5. How much spending or growth in spending could be cut with little or no effect on services is unknown.Google Scholar

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Interested readers may want to refer to several recent symposium issues of leading journals, including: JAMA, Caring for the Uninsured and Underinsured, 265(1991):2491–2567; Health Care Financing Review, Annual Supplement: 1-107 (1991); Inquiry, Universal Access to Affordable Health Care 29 (1992):113-273; Health Affairs, Managed Competition: Health Reform American Style? 12:(Supplement 1993):7-293; Journal of Health Politics, Policy and Law, Comparative Health Policy, 17 (1993):613-957. Useful books include: Enthoven, Alain C., Health Plan: The Only Practical Solution to the Soaring Cost of Medical Care (Reading, MA: Addison-Wesley, 1980) (a forerunner of “managed competition”); Aaron, Henry J., Serious and Unstable Condition: Financing America's Health Care (Washington DC: The Brookings Institution, 1991) (centralized controls through a “single payer”); Starr, Paul, The Logic of Health Care Reform: Transforming American Medicine for the Better, (The Grand Rounds Press, 1992) (“managed competition” within a “global budget”).Google Scholar