[Economic Report of the President (2002)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]

 
CHAPTER 4

Promoting Health Care Quality and Access


Health care is one of the largest sectors of the American economy,
and one of the most vibrant. Biomedical research has led to dramatic
advances in our understanding of the human genome, basic biology, and
mechanisms of disease, and in our ability to diagnose and treat
illness. More researchers from the United States have been awarded
Nobel prizes in medicine in the past 40 years than from all other
countries combined. Innovative diagnostic and imaging tools have
improved our understanding of diseases and our ability to identify
illnesses quickly, accurately, and painlessly. Novel drugs, devices,
and techniques have dramatically improved the treatment of a wide
range of illnesses. New information systems, including those relying
on the Internet, allow health care providers to work more effectively
with their patients to manage illnesses and avoid complications.
These advances testify to the success of our health care system in
encouraging discovery and innovation. Coupled with a strong tradition
of dedicated, professional care, they hold great potential for
further improvements in the health of Americans.
Evidence from biomedical, epidemiological, and economic studies
confirms that these technological advances have made Americans far
better off. An American born in 1990 can expect to live 7 years
longer than an American born in 1950. The mortality rate from
coronary heart disease, the Nationï¿½s leading killer, has declined by
40 percent since 1980, both because of reductions in the incidence of
serious heart events like heart attacks and because of better
outcomes when those events occur. Among seniors, rates of disability
have declined by more than 20 percent in the past two decades. Many
complex factors have undoubtedly contributed to these improvements.
For example, better scientific understanding of diseases has enabled
Americans to make lifestyle changes, such as quitting smoking, to
reduce their risk, and improvements in economic conditions and public
health have enabled more people to avoid environmental health risks.
But a growing body of research indicates that medical technology
played a starring role in these dramatic improvements.
Thanks to these innovations, the number, scope, and quality of
available medical treatments have risen dramatically. These
improvements in medical treatment, rather than rising prices or other
causes, have been the single most important contributor to growth in
medical expenditure. In large part as a result of the expanding
capabilities of medical care, the United States now spends 13.4
percent of its GDP on health care, and this figure is predicted to
rise to 15.9 percent by 2010. There is growing evidence that, on
average, the health improvements resulting from newer, better, and
more intensive treatments have been well worth the added cost. But
there is also growing evidence that substantial opportunities remain
both to reduce costs and to achieve greater health improvements
through more effective use of medical servicesï¿½that is, to improve
the value, or output per dollar spent, of our health care system.
Even though the American health care system provides high-quality
care overall, too often Americans receive neither the best care nor
the best care for the money. Whether lower value care results from
the underuse of basic preventive services, the overuse of medical
procedures in patients unlikely to benefit from them, or the misuse
of treatments resulting in preventable complications, there is
tremendous potential to improve the value of health care in the
United States.
With rising health care costs have come rising concerns about the
affordability of health care. Many health care expenses are
unpredictable, and serious illnesses have the potential to place
households in financial peril. Insurance is a standard solution: in
a well-functioning insurance market, individuals pool their risks,
trading unpredictable and potentially large expenses for much
smaller, more certain expenses in the form of insurance premiums and
copayments. Yet about one in six Americans lacks any kind of health
insurance, and many more Americans are concerned about the value of
available health insurance plans. Providing high-value health
insurance is not easy. Generous, first-dollar insurance does
provide protection against the high costs of medical treatment, but
by eliminating incentives to weigh the costs of medical care against
its expected benefits, it also contributes to the overuse and the
misuse of medical care.
Health care also differs from many other goods and services in that
Americans generally believe that basic health care should be
available to all members of society, even those with little or no
ability to pay. Public support in the form of assistance with health
insurance and health care costs helps achieve this goal and accounts
for well over $400 billion annually in Federal expenditure and
forgone tax revenue. In the past, advocates for expanding government
health insurance programs such as Medicare and Medicaid to address
the problem of uninsurance have maintained that ``guarantees'' of
coverage, plus government regulation of prices for covered services,
could provide high-value health care services. But government health
care plans have faced enormous difficulties in keeping up with
innovations in medical practice and in providing high-quality,
innovative care. Medicare still does not cover prescription drugs,
and Medicare beneficiaries must increasingly rely on supplemental
private insurance to provide acceptable coverage. Many Medicaid
plans, facing rapid cost increases and very low provider
participation rates under the traditional approach of regulated
fee-for-service insurance, are adopting alternative strategies to
provide coverage. Other major industrialized nations with larger
public health insurance programs, such as France, Germany, Japan,
Switzerland, and the United Kingdom, are also experiencing rapid
growth in expenditure and problems with the provision of high-quality
care.
Private health insurance also has faced difficulties in supporting
high-value health care. In the early 1990s, advocates of managed care
believed that plans combining insurance with new financial and other
incentives for health care providers to control costs could result in
higher value care. But although managed care did contribute to a
slowdown in medical cost growth in the mid-1990s, public uncertainty
about the quality of care in managed care plans has increased, and
this uncertainty has been accompanied by a return of rapid cost
increases in private insurance. Many Americans are not satisfied with
the cost and quality of the public and private health care coverage
options now available to them.
Another important obstacle to high-value care is the quality of
information available in markets for medical care. In most market
settings, consumers' purchase decisions are based on good information
on the value of the products they buy. But in health care the lack of
good information on the success of different treatments--in terms of
the best outcome per dollar--means that individuals and families have
difficulty making informed decisions, and insurance companies are not
rewarded for altering their coverage to encourage high-value care.
Thus strategies to improve the value of care include supporting the
development of better information for patients and providers on
high-quality, high-value treatments.
In the face of these various problems, many have concluded that
American health care policy is again at a crossroads, with fresh
policy approaches needed to support innovative health care in the
future. New policy directions are being proposed, a consistent theme
of which is the encouragement of patient-centered care--care that puts
the needs and values of the patient foremost and makes the patient
the primary clinical and economic decisionmaker, in partnership with
dedicated health care professionals. Patient-centered care requires
more flexibility and innovation in health care coverage; it also
places more responsibility on the patient--and less reliance on
third-party payers and government regulators--to avoid wasteful
costs. To encourage the development and use of such innovative
coverage options, competitive choices among health insurance plans
and among health care providers are more important than ever. In
turn, effective competition to help all Americans get the care that
best meets their needs requires innovative, market-oriented health
care policies.
To achieve more patient-centered health care by encouraging
innovations in the financing and delivery of services in this dynamic
sector of the economy, the Administration is pursuing three broad
objectives:

     Develop flexible, market-based approaches to providing
health care coverage for all Americans. Markets respond
more rapidly than bureaucracies to the changing
technology and new innovations in products and services
that characterize the American health care system.
Market flexibility and competition are essential if
medical treatment decisions are to reflect patients'
individual needs and personal preferences and are to be
based on the best available evidence on benefits and
costs. Important obstacles to innovation in health
care coverage must be addressed, such as the potential
for competing plans to reduce costs by designing
benefits to attract healthier enrollees rather than
by providing more efficient care for all persons
regardless of their health risks. But these obstacles
must be addressed through health care policies that
increase rather than reduce insurance coverage rates.
Competition need not threaten the quality of care
received by those with the least ability to pay;
rather, government support and oversight can be
better directed to ensure that all Americans are able
to participate effectively in a competitive health
care system.
     Support efforts by health care providers and patients to
improve the quality and efficiency of care. The
incentives provided by a truly competitive system of
health insurance coverage choices are an essential
foundation for a high-quality, efficient health care
system for the 21st century. But other policy changes
are also needed to create an environment for medical
practice that encourages high-quality, efficient care.
Government and private health care purchasers can
also help patients and providers develop and use
better information on the quality of care, improving
the ability of patients to identify high-quality
providers and plans and helping providers deliver better
care. Improving the environment for medical practice
also includes reforming the litigation systems dealing
with medical liability and reducing regulatory barriers
to innovations in health care delivery.
     Provide better support for biomedical research.
Outstanding basic research and path-breaking biomedical
innovations have already had enormous payoffs,
generating long-term public benefits. Because of the
high returns on these investments, Federal support for
biomedical and other scientific research should be
enhanced. At the same time, the Federal Government can
expand and improve the knowledge base for medical
practice, by supporting projects that analyze which
treatments work best for whom, how they can be
delivered safely, and which health care providers are
doing the best job for their patients.
The remainder of this chapter explores each of these critical
issues for improving the quality and value of health care in more
detail. As treatment options continue to multiply and costs continue
to increase, improvements in the value of health care would make
Americans more willing to purchase coverage for themselves and to
pay the taxes required to subsidize it for those who need additional
assistance.
Encouraging Flexible, Innovative, and Broadly Available
Health Care Coverage
Recent Trends in Health Care Costs and Coverage
Health care spending grew rapidly during the past decade, from
$916.5 billion in 1990 to $1,311.1 billion in 2000, or more than 3.6
percent a year on average (2.6 percent a year in per capita terms;
Chart 4-1). Home health care expenses and drugs were the fastest
growing categories of this expenditure (Chart 4-2). The real,
constant-dollar cost of private health insurance increased by 4.9
percent a year between 1984 and 1999. Since the 1980s, health care
benefits have also increased substantially as a share of total
compensation for workers. Growth in health care costs is projected
to accelerate, with total expenditure predicted to account for 16
percent of GDP by 2010. Over the longer term, forecasts predict that
health care spending will become even more predominant in the
economy, continuing a 60-year economic trend and reaching as much as
38 percent of GDP under conservative assumptions.
Rising costs of private health insurance in the 1980s and early
1990s led to the emergence of managed care in private health
insurance plans. Managed care seemed to offer a solution to a
fundamental health care dilemma. Its small copayments and low
out-of-pocket limits protected individuals from substantial
out-of-pocket health care costs. At the same time, its cost control
mechanisms--including capitated payments, preferred provider
networks, preapproval and utilization review requirements, and
restricted formularies discouraged the use of some discretionary
medical services whose benefits were likely to be low relative to
their cost. In traditional fee-for-service health insurance, in
contrast, third-party insurance made patients and providers less
sensitive to the value of medical services per dollar spent.
In the mid-1990s, managed care succeeded temporarily in limiting
cost increases, largely by negotiating lower payments to providers
for specific services, and by discouraging utilization of some
medical services and avoiding some costly complications of
inappropriate treatment. Thus, for a





while, managed care by and large
achieved its primary goal: bringing the rise in insurance premiums
under control without compromising quality of care. Today, however,
with the perception that managed care has often focused more on
reducing costs than improving quality, many of the managed care
approaches to controlling cost increases may be reaching their
limits: providers are negotiating more effectively with health plans,
patients are pressing for greater choice of providers, restrictions
on treatment choices are being challenged in courts and legislatures,
and few additional easy targets for reducing costs remain (Box 4-1).
As a result, premiums for private health insurance are again rising
rapidly.
Public health care spending has grown rapidly as well, so that
government-sponsored health insurance plans are facing cost increases
that seem difficult for taxpayers to sustain. Federal, State, and
local governments have long been involved in the financing,
provision, and regulation of health care services. The Federal
Government directly spends over $200 billion annually for the
Medicare program, which provides health insurance for nearly all
elderly and disabled Americans, and over $100 billion annually for
Medicaid, the joint Federal-State program that provides health
insurance for low-income and medically needy populations. Federal
Medicaid funds are matched by almost



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Box 4-1.  Managed Care: Good, Bad, or Somewhere in Between?

The managed care option is an important one for many Americans. The
vast majority of nonelderly Americans with private insurance are now
enrolled in some form of managed care, representing a sea change in
health insurance coverage over the past decade. The reputation of
managed care organizations has suffered in recent years, however,
and the widespread perception, based largely on anecdotal cases, is
that care is worse. To what extent does research on the performance
of managed care plans bear out this perception? Not surprisingly, the
picture is mixed.
A large number of studies that have looked at quality of care have
found no significant differences between health maintenance
organizations (HMOs) and fee-for-service plans. Along some
dimensions, such as the routine management of chronic illnesses and
the provision of preventive care, HMOs tend to perform better. Many
managed care programs are better able to implement systematic
monitoring of quality of care, particularly for chronic and
preventive care. In one study, for example, only 35 percent of women
in fee-for-service plans received scheduled mammograms, whereas 55
percent in managed care plans did. In addition, because they have
been able to negotiate lower prices from their network providers and
for their formulary drugs, many HMOs have been able to offer more
comprehensive benefits, such as lower copayments on prescriptions.
In turn, this may contribute to better adherence to recommended drug
therapies and other treatments among patients in HMOs.
However, certain studies have found better performance in
fee-for-service plans in particular instances, especially those
involving more costly management of patients with complex illnesses.
Although they do not make a compelling general case against HMOs,
these studies provide some cautionary evidence that particular
attention should be directed toward ensuring that plans have good
incentives to care for patients with predictably costly diseases.
This can be accomplished through public policies that discourage
risk selection and that provide good information on quality of care
for people to use in choosing plans.
Private insurance markets have already responded to such concerns.
For example, HMOs with closed networks are not the most popular or
the fastest-growing form of managed care coverage today. Over the
past 5 years, employee enrollment in preferred provider and
point-of-service plans has increased from 42 percent to 70 percent,
while enrollment in traditional HMOs has decreased from 31 percent to
less than 23 percent. Overall, the vast majority of enrollees are in
some form of coordinated care. The major exception to this trend is
the Medicare program, which has a low rate of HMO enrollment (because
of significant payment and regulatory problems) and has had
considerable difficulty making preferred provider organizations,
point-of-service plans, and other nonnetwork managed care plans
available.

____________________________________________________________________


$80 billion in State and local
contributions. The Federal Government also provides approximately
$100 billion a year in tax exclusions to support private health
insurance for workers who receive coverage through their employers.
Historically, the Medicare and Medicaid programs have been
government-run, fee-for-service insurance plans. They have controlled
growth in costs through tight price controls and restricted coverage.
For example, Medicareï¿½s government-run plan does not cover
prescription drugs or widely used disease management programs that
assist beneficiaries with chronic illnesses. This is in part because
the introduction of new benefits in government-run programs tends
to require either extensive rulemaking or new legislation, and in
part because of policy concerns about the potential costs of these
benefits. Access to treatment may also be restricted when physicians
refuse to participate in a program, because of either administrative
complexities or (in the case of Medicaid) low fee-for-service
reimbursement rates in many States. The combination of tight price
controls and restrictions on access to treatment is likely to make it
even more difficult for government-run health insurance plans to keep
up with treatment innovations in the future.
Despite these efforts to control costs, annual Federal Medicare
expenditure (in constant 2000 dollars) increased from almost $141
billion to $215 billion between 1990 and 2000, and combined Federal
and State Medicaid spending almost tripled, rising from $95 billion
to $202 billion. The faster growth in Medicaid spending resulted from
expansions of eligible populations, including new coverage through
the State Children's Health Insurance Program (SCHIP), and from more
rapid growth for certain benefits, including outpatient prescription
drug coverage for some recipients and long-term care
services--benefits not included in Medicare. Both Medicare and
Medicaid are expected to continue to grow rapidly relative to Federal
budget resources. Over just the next 10 years, Medicare spending is
expected to double, as is Medicaid and SCHIP spending. Medicare has
dedicated payroll tax financing for its hospital insurance
(Medicare Part A) benefits, but the 2001 Medicare trustees' report
projects that by 2016 the system will begin to spend more than its
tax revenues bring in, and that by 2029 the program will become
insolvent, unable to pay these benefits. Furthermore, these hospital
insurance benefits account for only a portion of Medicare
expenditure. Supplemental medical insurance (Medicare Part B)
expenditure is financed primarily by general revenue. Without program
changes, by 2030 Medicare is projected to account for 4.1 percent of
GDP and 21.9 percent of Federal revenue, and Federal Medicaid
payments are projected to equal 2.4 percent of GDP and absorb 12.8
percent of Federal revenue. Medicaid and SCHIP are also creating
growing budgetary pressures for States: already the programs
account for around 20 percent of aggregate State spending.
Although still high, the proportion of the population covered by
health insurance has generally been falling as health care costs have
been rising. This rise in the uninsured population has occurred
despite the substantial eligibility expansions for Medicaid and SCHIP
and despite the growing share of Americans eligible for Medicare. In
the absence of new policy directions, a further decline in the number
of Americans with access to health insurance is a serious risk, as a
result of loss of jobs or reductions in benefits, even if further
expansions of eligibility for government programs occur. These
trends,  considered in more detail below, provide important lessons
for encouraging competitive innovations in health care coverage,
whether in private insurance markets or in public programs.
Addressing Barriers to Effective Competition in
Health Insurance
In most sectors of our economy, competitive private markets coupled
with good information work well to improve the welfare of Americans.
Tight government regulation and extensive direct government financing
are not needed. The health care market has traditionally been
regarded as different, however, for several reasons. Among these
are potential inefficiencies resulting from adverse selection and
moral hazard; an insufficiency of information available to patients,
health providers, and insurers; and societal concerns about access
barriers for lower income or disadvantaged Americans. Some have
argued that these problems create fundamental obstacles to
competitive approaches to health care delivery, requiring extensive
Federal involvement in regulation and financing.
Tighter regulation and increased Federal oversight, however, are
likely to lead to the same kinds of inefficiencies and stagnation
seen in other highly regulated industries. Even Medicare, which has
primarily consisted of government-provided fee-for-service insurance
for elderly and disabled Americans, has long included some
competitive private health plan options. To preserve and improve
health insurance options for all Americans, the Federal Government
can encourage policy reforms that improve the functioning of health
care markets, building on steps already being taken by public and
private payers.
A crucial obstacle to the effective functioning of competitive
markets for health insurance is the problem of adverse selection.
Adverse selection occurs when people who expect to incur significant
health expenses sign up for more generous, less restrictive health
plans in greater numbers than do healthier people. Because these more
generous plans attract patients with higher medical costs, premiums
for those plans are driven even higher, making the plan even less
attractive to healthy individuals, in a classic ``death spiral.''
Careful policy design, however, can help prevent problems
associated with adverse selection. Many large employers, including
many States and the Federal Government, have adopted a variety of
competitive systems that offer choices to the populations they
cover. The following steps can reduce selection problems:
     Introduce benefit standards. In the absence of any
benefit standards, insurance plans could attract a
healthier mix of enrollees by reducing benefits and
insurance premiums,  potentially undermining the
insurance protection offered and driving up the
costs of competing plans that have less healthy
enrollees. By contrast, broad, flexible standards--such
as requiring catastrophic protection and some coverage
for all common health problems--have encouraged stable
competition among a variety of types of plans in the
Federal employees' system and other successful
competitive choice systems used by large private
employers. However, specific coverage mandates--such
as inflexible restrictions on copayments or required
coverage for particular types of medical services--may
not only exacerbate adverse selection, by causing more
individuals to drop coverage entirely, but also unduly
inhibit innovations in coverage.
     Adjust premiums for risk. Some purchasers implicitly
or explicitly require additional contributions for the
plan choices of higher cost enrollees. For example, plan
payments might be adjusted based on age, sex, and
certain health characteristics (Box 4-2). Medicare is
currently expanding its risk adjustment factors to
include a range of chronic health conditions.
     Limit enrollment periods. Employer plan choice systems
generally allow plan changes only during a once-a-year
``open enrollment'' period, except in special
circumstances. The limited lock-in period reduces the
likelihood that people will enroll in an inexpensive
plan with limited benefits and then switch to a more
generous plan just when treatment is needed for a
health problem.
     Provide limited additional subsidies for higher cost
plans. In some competitive choice systems, employer
contributions are set equal to a flat amount. In
contrast, in the Federal employeesï¿½ program and many
other employer purchasing groups, employer contributions
increase with the health planï¿½s cost over some range of
plan choices, reducing adverse selection pressures.
Recent proposals for improving competition in Medicare
and for providing assistance for purchasing private
coverage in the form of refundable tax credits would
provide partial subsidies for additional expenses, up to
a cap.
     Introduce health care accounts. Dedicated accounts that
provide a tax-favored ``buffer'' in the event of
significant health expenses can make plans with
nontrivial out-of-pocket payments more attractive to
workers who perceive themselves as having a higher risk
of significant expenses. This may reduce the extent to
which high-risk individuals tend to choose more generous
plans, and at the same time give individuals more
control over their care.

There is now considerable evidence that the savings from efficiency
gains due to the adoption of competitive systems in large purchasing
groups are generally more than adequate to support even costly steps
to control adverse selection. Such steps can include providing some
limited or partial subsidies to help sustain the higher cost plans
that some of the covered populations prefer.
For insurance markets involving small firms and individuals without
access to group coverage, adverse selection problems can be more
severe. To varying degrees, States permit providers in the market
for individual insurance to rate


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Box 4-2. The Need for Good Risk Adjustment
Price competition in insurance markets can be a powerful force for
efficiency, but it must be used carefully if it is to result in
better care for patients. Consider, for example, a large firm that
offers its workers a menu of insurance plans. If the firm pays the
insurer a flat, or ï¿½capitated,ï¿½ fee for each enrollee, insurers
offering these plans will have an opportunity to increase their
profits by enrolling only the healthiest patients, since they will
tend to have the lowest medical spending. In this situation the
financial incentive for the insurer is not to provide high-quality,
high-value care, but simply to identify and enroll healthy patients.
The same issue arises in Medicare or Medicaid, when enrollees choose
a managed care plan and the plan receives a capitated payment from
the government for providing care.
Public or private plan sponsors can correct this incentive through
risk adjustment, that is, adjusting their payments to the insurers
on the basis of risk. Insurers need to be paid more to cover
enrollees with higher expected medical spending, to remove the
incentive for ï¿½cream skimming.ï¿½ Instead, plans will have an
incentive to improve the quality of care so as to attract all
patients.
The best practices for risk adjustment continue to evolve. Although
it is very difficult to predict an individualï¿½s future medical
spending, researchers are developing more effective techniques for
doing so. Moreover, there is growing evidence that many medical
expenses are not predictable and that, in the vast majority of cases,
very high expenditures, when they occur, do not persist for many
years. Some types of predictable expenses do not reliably or
uniformly influence health plan or provider choices.
Medicare and Medicaid have played an important role in the
development of effective risk adjustment techniques. For example,
Medicare is developing a system of risk adjustment that relies on
detailed diagnostic information collected from both inpatient and
outpatient sources. As risk adjustment techniques continue to
improve, health plans will increasingly have to compete for enrollees
on the basis of the quality of care they provide.

____________________________________________________________________


each individual on the basis of his or her medical risks and past
medical expenditure. The practice of underwriting is not
controversial for many lines of insurance, such as automobile and
home coverage, where differences in claims are largely the result of
voluntary individual behaviors such as driving habits. In health
care, however, a significant part of an individualï¿½s disease risk is
outside his or her control. To reduce the extent to which high-risk
individuals face higher premiums, and to improve the availability of
certain health insurance benefits, States and the Federal Government
have imposed a range of restrictions on insurance underwriting
practices as well as coverage mandates on nongroup (and in many cases
on group) health insurance plans. The 1996 Health Insurance
Portability and Accountability Act imposes some Federal requirements
on insurance offered by private insurers, so that individuals who
change jobs but wish to continue their health coverage face only
limited underwriting restrictions in doing so. Some States impose
more significant restrictions on insurance underwriting practices, in
the form of guaranteed issue and community rating requirements.
Such restrictions tend to reduce insurance premiums for high-risk
individuals but increase them for lower risk individuals; they may
also encourage individuals to wait until they have a significant
health problem before enrolling. The result may be less insurance
coverage and only limited reductions in premiums for chronically ill
individuals, as healthier individuals choose to forgo coverage
entirely rather than pay higher premiums. Thus it is an empirical
question to what extent the benefits of making coverage more
available for high-risk individuals outweigh the costs of higher
average premiums and insurance rates. Stringent underwriting
restrictions in individual insurance markets, such as guaranteed
issue and community rating, may severely limit the availability of
individual insurance and lead to very high premiums. Thus coverage
mandates and underwriting restrictions should be undertaken only
after careful analysis of their impact on health insurance premiums
and coverage rates. Although limited restrictions on underwriting
practices and coverage mandates may incrementally increase the
availability of more generous coverage, even these policies are
likely to increase the average cost of health insurance, and thus to
have some adverse effects on health insurance coverage rates.
An alternative to tighter regulation is to take steps to lower
health insurance costs and thus encourage broader participation.
Voluntary purchasing groups and association health plans, which allow
individuals or small groups to band together to purchase insurance,
are a promising approach. Supported by standards to ensure financial
solvency and group membership based on factors other than health,
these purchasing groups have the potential to achieve economies of
scale in negotiating lower rates with participating insurers, and may
be able to set up a competitive choice system that would otherwise
be very difficult for individuals and small groups to manage. In
addition, they may be able to reduce the relatively high fixed
costs associated with enrolling a group. (Many of the administrative
costs of health plans are largely independent of group size, whereas
some costs, such as underwriting, are higher for smaller groups or
for individuals.) Each purchasing group can also adopt strategies
used by large employers to encourage competition and manage adverse
selection.
Some local regions as well as some States such as California have
set up and then privatized insurance purchasing cooperatives for
small businesses. Many experts have suggested that States, which have
considerable experience with competitive purchasing groups for their
employees and (in a growing number of cases) for their Medicaid and
SCHIP plans, would also be effective sponsors of individual
purchasing groups. In addition, some private companies have set up
voluntary programs for small agricultural groups, and many
``affinity group'' insurance plans are available for individuals: for
example, many professional associations and college alumni
associations offer insurance programs. The early experience of such
groups in generating lower premiums through competition and economies
of scale, and their effect on risk segmentation in health insurance
markets, have been mixed. Some purchasing groups have been unable to
obtain health insurance premiums that were significantly better than
those available from independent insurance brokers. However, many
group purchasing arrangements and association plans have attracted
large enrollments and have been able to keep premiums stable and
competitive without selectively excluding high-risk participants.
Steps to encourage the development of purchasing groups, such as
providing them the same exemptions from complex and variable State
coverage mandates available to large employers while creating clear
mechanisms to ensure solvency, are likely to make these options more
widely available.
The market for individual health insurance would also be improved
if the same kinds of subsidies that have worked well in employer
group markets were available. As described in more detail below,
subsidies such as a refundable tax credit would significantly lower
premiums, thereby reducing adverse selection because a larger number
of healthy individuals would take up coverage. In addition, 29 States
have significantly improved the functioning of their individual and
small-group markets by setting up high-risk pools. These pools
provide the opportunity for hard-to-insure individuals to purchase
subsidized coverage in a special purchasing group. Typically, the
pools are funded by broad-based fees, for example an add-on to
health insurance premiums or fees. The eligibility, subsidies, and
funding mechanisms vary from State to State, contributing to
differences in the stability of the pools, in their effect on health
insurance costs for chronically ill people, and in their ability to
address adverse selection problems in the Stateï¿½s individual health
insurance market.
Alternatively, innovative approaches by independent insurance
brokers aimed at reducing the loading or transactions costs for
individuals and small groups seeking insurance may also lower costs
and expand participation. For example, online insurance
``clearinghouses'' allow small firms and individuals to obtain
competitive rate quotes quickly from a large number of insurers.
This improves price competition and can help reduce signup costs
(for example, through a standardized online application procedure).
A further concern about competition in the health care system
involves poor information. In addition to the problems of adverse
selection already discussed, patients, providers, public
policymakers, and taxpayers often have to make major decisions about
medical treatments, regulations, and financing choices with only
limited information. The obvious solution is to develop better
information on treatments and on health system performance. Helping
patients to understand their choices not only empowers them to choose
the care they want but also leads to better decisions and, in some
cases, reduced costs.
Finally, health care financing and regulation can and should
reflect and reinforce the foundation of professional norms and ethics
underlying the American health care system. Physicians, nurses, and
other health professionals have a long tradition of caring deeply for
patients and of working closely with them to provide the care that is
in their best interests. Too often, however, these health
professionals must work in a regulatory and economic environment that
fails to encourage high-quality, efficient care. As these barriers
are overcome, leading to fewer errors and more effective treatments,
more Americans will find participation in health plans worthwhile.
This important issue is addressed in the next section.
Increasing Health Insurance Coverage
Clearly, innovative approaches are needed now more than ever to
help keep up-to-date health insurance available to workers and
temporarily unemployed Americans and their families, and beyond that,
to increase rates of health insurance coverage. To encourage such
innovations, public policies should encourage a broad range of
coverage options. Some of the most promising approaches to increasing
coverage provide support for purchasing health insurance and health
care services while easily adapting to changing circumstances and
patient needs. Policy studies indicate that several principles are
important:
     Recognize existing support. Tax exemptions for employer
contributions to private health insurance are an
important contributor to the stability of
employer-sponsored health insurance plans. Although a
concern is that unlimited tax exemptions may create an
incentive to purchase very costly health care coverage,
this form of subsidization does make health insurance
more affordable for employees and contributes to very
low rates of uninsurance--around 5 percent--for workers
who are offered employer-sponsored coverage.
     Focus new Federal support on those most likely to be
uninsured. Some groups currently receive little or no
assistance with their health insurance costs. Most
notably, workers who must purchase individual coverage
because their employer does not offer health insurance
generally receive no tax subsidies for health insurance
at all. Many small employers and employers of low-wage
workers do not offer health insurance. This lack of
subsidization is a major reason why individuals in
families with incomes less than twice the poverty line
have very high uninsurance rates, around 25 percent,
and account for a majority of the uninsured. Researchers
have found that unemployed workers are three times more
likely than employed workers to be uninsured. Often
these workers are eligible to continue their former
employer's coverage temporarily through COBRA (or are
covered under ``mini-COBRA'' laws in 38 States that
expand COBRA to smaller employers), but usually they
must pay the full cost of their insurance. (COBRA
refers to provisions under the Consolidated Omnibus
Budget Reconciliation Act of 1986.) Those ineligible
for COBRA, and those whose former firm no longer exists
or no longer offers health insurance, also receive no
tax subsidies. Unemployed workers are likely to regain
coverage on finding a new job and generally are not
without insurance for long periods. Hence, temporary
assistance for involuntarily unemployed workers would
also be relatively likely to reduce uninsurance rates.
In contrast, because insurance coverage rates are
already high among the many workers with employer-based
coverage, any new or expanded Federal assistance to them
beyond existing tax subsidies would be more likely to
crowd out existing private contributions. That is,
such assistance might encourage workers who would
otherwise have kept their private coverage to obtain
coverage under the new Federal program instead, and thus
save money even if the coverage is not as good. Such
assistance might also  decrease the incentive for
employers to offer health benefits in the first place.
New support would thus improve the incomes of the
affected workers but would have a relatively modest
effect on health insurance coverage.
     Design any new assistance to maximize takeup by those
without coverage. Many uninsured Americans have little
income tax liability and are likely to work in firms
with other workers without substantial tax liability.
Thus tax incentives that are valuable only to
individuals and families with substantial income tax
liabilities (such as income tax deductions) do little to
encourage coverage. In contrast, refundable tax credits
would provide valuable assistance. In addition, because
many uninsured households have few liquid assets such as
personal savings with which to pay health care bills,
tax credits must generally be available at the time
health insurance is actually purchased (that is, they
should be ``advanceable'').  For the same reason,
credits should not be subject to a significant risk of
additional ``reconciliation'' payments at the end of the
year.
     Encourage a broad range of coverage options. Minimum
standards for coverage, such as protection against
catastrophic health care expenses, are important both
to ensure that the policy chosen actually covers the
significant financial risks and to discourage
inappropriate health plan strategies for risk selection.
But the fact that many new approaches to delivering
care are under development and becoming more widespread
now means that specific mandates and restrictions on
sources of coverage are especially likely to foreclose
valuable innovations in health insurance, limit the
attractiveness of available coverage options, and
increase uninsurance.
As important as the goal of expanded health insurance coverage is,
it is also important to remember that increasing health insurance
coverage is a means to an end: effective medical treatment of all
Americans, where the definition of ï¿½effectiveï¿½ depends importantly on
the preferences and unique circumstances of each patient. As the next
two sections describe in more detail, both public programs and
private health insurance plans have considerable room for improvement
in meeting this goal. Public policies should seek not only to
increase health insurance coverage rates, but also to increase the
value of health insurance that is provided, by promoting
opportunities for individual choice and responsibility.
Innovative Tax Incentives for Increasing Private Health
Insurance Coverage
A wide range of proposals focus on refundable, advanceable,
nonreconcilable tax credits to reduce uninsurance rates. Refundable
credits have the same dollar value regardless of taxable income.
Advanceability means that the credit is available when eligible
individuals are actually purchasing insurance; they need not wait for
a refund until the following year when they file their tax return.
Nonreconcilability means that, when the advance credit is awarded,
eligible individuals need not worry about retroactively losing
benefits at the end of the year, for example if their income turns
out to be higher than expected.
Under the Administrationï¿½s proposed health insurance tax credit,
which phases out with income, an individual's income in the previous
tax year would be used to determine eligibility for the advanceable
credit. Those who qualify would receive certificates that could be
used like cash to purchase coverage, so that the eligible individual
need only pay the difference between the plan premium and the tax
credit. Because the previous yearï¿½s income is already known, no
eligible individual would be afraid to use the credit for fear of
turning out to be ineligible because of too-high income at the end of
the year. The refundability of the tax credit would augment the
ability of lower and moderate-income individuals to purchase private
health insurance, giving them improved access to competing plans. The
resulting broader participation in private health insurance markets
would reduce pressures for adverse selection.
The Administrationï¿½s tax credit would be available to people
purchasing private health insurance coverage outside of plans offered
by their employer or their spouseï¿½s employer. That is, working and
unemployed people who do not already have tax-subsidized,
employer-provided insurance would be eligible. Similar Congressional
proposals would also make assistance available for purchasing COBRA
coverage. These groups currently have the lowest takeup of available
private coverage, because they are not currently subsidized. As a
result, these proposals should achieve large net increases in
coverage per dollar of program costs.
The generosity of the credit would also influence the
cost-effectiveness of the expansion of coverage. A very generous
credit would obviously induce more people to take up coverage but,
depending on its design, might also draw more workers away from
current employer coverage. The result would be a relatively expensive
incentive with relatively less net effect on coverage. Recent studies
of insurance markets and worker decisions about taking up coverage
suggest that a capped credit of around $1,000 for individuals and
$2,000 for families strikes a reasonable balance. A credit in that
range would cover half or more of the cost of a reasonably
comprehensive health insurance plan--one that provides preventive
coverage and major-medical protection--for most of the uninsured, yet
would not be so generous as to substantially crowd out
employer-sponsored health insurance. Although many studies indicate
that such a credit would provide enough of a subsidy to have a major
impact on coverage, particularly for younger, healthier individuals,
a potential problem is that it would cover a much lower percentage of
the premium for individuals over 50 and those with chronic illnesses,
for whom rates in the individual market are considerably higher.
However, the additional policy steps described previously, such as
additional subsidies through risk adjustment and high-risk pools, or
expanded availability of voluntary purchasing groups, would help
markets for non-employer-sponsored health insurance function better
for these groups.
Some health policy experts and Members of Congress have proposed a
broader based refundable tax creditï¿½one that would also provide
significant new subsidies to all workers with employer-provided
coverage. Because so many workers have employer coverage already,
however, a tax credit for employer coverage would have a far greater
budgetary impact, and a much larger share of its costs would go
toward existing rather than new health insurance coverage. To limit
the additional budgetary costs, many experts have proposed a
gradual transition from the current tax exemption to a system of tax
subsidies for employer coverage that relies more on credits. Although
such a transition would probably encourage lower cost employer
coverage and increase the takeup of employer coverage by lower income
workers, it could have a significant impact on current employer
plans, union negotiations, and other issues affecting worker
compensation.
Clearly, the proposed tax credits would not cover the full costs of
very generous, ï¿½first dollarï¿½ health insurance plans. Yet there are
many reasons why such expensive coverage may not make good economic
sense in any case. First, minimal copayments lead to moral hazard in
health care spending: because the marginal cost to the patient of
health care services is so low under such plans, a disconnect emerges
between cost and value in health care decisions, contributing to
rising health care costs and patient frustration. In the future,
assuming that health care costs continue to rise rapidly, such
policies will be even less sustainable. Second, reliance on minimal
copayments in both private managed care and government health
insurance plans has led to significant regulatory intrusions and
price controls, which adversely affect doctor-patient decisionmaking.
However well intentioned as an approach to limiting cost increases,
such intrusions may make it more difficult for patients to get
appropriate treatment.
On the other hand, many families do not have sufficient liquid
assets to absorb even a few thousand dollars in health costs without
sudden, major disruptions in their other household spending. To
encourage saving for such contingencies, some innovative proposals
have been developed. Some of these would help families set aside
a ``buffer'' account to absorb such costs, for example by relaxing
the carryover limitation on flexible spending accounts or the
restrictions on medical savings accounts. Currently, many employers
allow employees to set aside predetermined dollar amounts on a
tax-free basis in such accounts to be used for health care or child
care expenses. However, employees in these arrangements must spend
all of their allocated dollars annually, and so cannot accumulate
assets to be used in the event of a serious illness in the following
year. This use-it-or-lose-it requirement contributes to unnecessary
year-end medical spending. If at least some of the account balances
could be rolled over to future years, workers could build up a
rainy-day health account by making relatively painless, regular,
tax-deferred contributions to interest-bearing accounts.
Such permanent flexible saving accounts would be similar to 401(k)
retirement accounts, which have quite high rates of enrollment even
among the lowest income eligible groups. The combination of flexible
accounts with a tax credit or existing tax subsidies would make a
reasonably priced health insurance policy very attractive--the
premium would be relatively low, and the potential for some
out-of-pocket spending would not be a deterrent to choosing such a
plan. In fact, combinations of individual health accounts with
insurance plans that provide protection against substantial expenses
as well as freedom from traditional restrictions on managed care
coverage are now being offered by some employers, including the
members of the Pacific Business Group on Health. But the absence of
needed tax incentives may limit the attractiveness of these forms of
insurance. For example, employee out-of-pocket spending in these
innovative plans is not tax-deductible, and tax-favored contributions
to flexible savings accounts cannot be rolled over from year to year.
Expanding the availability of health accounts by addressing these
concerns would reduce financial barriers to access while encouraging
promising innovations in private health insurance.
Increasing Coverage in Public Health Insurance Programs:
Medicaid and SCHIP

Public health insurance programs can also benefit from innovative
approaches to expanding coverage. For example, even though SCHIP
has encouraged most States to provide coverage for children in lower
income families (those with incomes up to or approaching 200 percent
of the poverty level), one-fifth of such children remain uninsured,
compared with only 7 percent of children in families with incomes
over 200 percent of the poverty line. Innovative expansions of public
health insurance coverage for lower income households thus remain a
high priority. Particularly needed are expansions that would make
private health plans used by higher income families more affordable
to the growing number of working families covered through these
programs. In addition, employer-provided private health insurance
coverage is much less widespread among lower income than among higher
income households; therefore expansions of public health insurance
coverage are less likely to crowd out existing coverage, leading to
greater net reductions in the number of uninsured as spending in
the government health insurance programs rises. (See Chapter 5 for
further discussion of the crowding out of private programs.)
Many States have exercised options available under current law as
well as implemented specific Medicaid and SCHIP ``waivers'' to cover
the parents of eligible low-income children, because some evidence
suggests that parents are more likely to take up coverage for their
entire family than to enroll in children-only coverage. Some States
have also implemented waivers to extend coverage to childless adults
with low incomes, in the expectation that broader coverage for all
low-income persons will strengthen the Stateï¿½s health care
infrastructure. However, efforts to expand coverage are impeded by
the complex structure of Medicaid and SCHIP, which require States to
deal with multiple funding streams and administrative requirements
even to provide coverage for a single low-income family. In addition,
Medicaid's detailed and outdated statutory requirements mean that
virtually all States must frequently go through the Federal waiver
process to update their program. Although dramatic progress has been
made in clearing a backlog of plan amendments and waiver
applications, resulting in eligibility being extended to 1.4 million
additional individuals and coverage expanded for 4.1 million, a more
promising approach would emphasize the flexibility of program design
that has proved effective in SCHIP. This could be coupled with
heightened but reasonable accountability requirements, to permit
objective evaluations based on better evidence of whether State
program changes that are intended to increase coverage and improve
quality of care for program beneficiaries actually achieve their
goals.
Finally, many States are now providing coverage under Medicaid and
SCHIP through competing private insurance plans, suggesting that
the combination of public funding and competitive private provision
of health insurance coverage is an effective strategy for encouraging
innovation in health care delivery for low-income populations while
controlling costs. This topic is covered in more detail in Chapter 5.
A Coordinated Safety Net for the Uninsured:
Funding for Community Health Centers
Even with expanded subsidies for private and public insurance, most
research predicts that a substantial share of currently uninsured
Americans would remain uninsured. For this reason, and because
proposals to expand health insurance coverage will take some time
to implement, the Administration has also developed initiatives to
improve the availability and coordination of medical services for
those without coverage. This has been done by increasing the
flexibility of State and local governments to provide access for
low-income residents through integrated community health center (CHC)
programs. The mission of CHCs is to provide care to underserved
populations, including populations that have proved difficult to
reach through private or public insurance. To accomplish this, local
CHCs have developed innovative approaches that build on unique
community features and resources, and have collaborated with other
public, private, and academic programs.
For example, the Centers for Medicare and Medicaid Services (the
agency formerly known as the Health Care Financing Administration)
have partnered with the Institute for Healthcare Improvement
(a nonprofit organization) and with specific CHCs around the Nation
to improve health care for low-income individuals with chronic
illnesses such as diabetes, asthma, and cardiovascular disease. The
Clinica Campesina Family Health Centers in Lafayette, Colorado, the
Lawndale Christian Health Center in Chicago, and CareSouth Carolina
have developed programs adapted to their populations and have
achieved measurable improvements in diabetes care--including the
patient self-management efforts so central to successful treatment
of chronic illnesses.
CHCs have also developed innovative approaches through community
partnerships and collaborative funding strategies. For example,
Grace Hill Neighborhood Health Centers in St. Louis provide services
in two public housing projects and to the homeless in 16 sites
through a combination of Federal funding as a CHC, special Federal
expansion funds, and contracts with the city, the county, and other
CHCs. Grace Hill has also developed vital information management
systems, including registries of individuals with chronic illnesses,
relevant tracking reports to providers, and automatic reminders to
patients of needed preventive and follow-up tests. Because of their
community roots and their ability to focus on the distinctive needs
of their patient population, CHCs can provide a quality of care that
rises well above what might be implied by the term ``safety net.''
Making Medicare Coverage More Flexible and Efficient
One of the most obvious examples of the difficulty of keeping up to
date with innovations in health care delivery is the Medicare
program's lack of a prescription drug benefit. More than one-quarter
of Medicare beneficiaries have no prescription drug insurance at all,
despite the fact that diseases are increasingly being treated with
drugs rather than through hospital or clinic care. This lack of
prescription drug benefits among Medicare enrollees has had adverse
health consequences. In one study the use of cholesterol-lowering
drugs, an essential component of care for many individuals with
coronary heart disease, was 27 percent for appropriate elderly
Medicare enrollees with supplemental, employer-provided plans
providing drug coverage, but only 4 percent for those with no drug
coverage at all. Innovative drug use for the treatment of ulcers
costs $500 per patient but can save as much as $28,000 by avoiding
the need for a prolonged hospitalization.
Lack of prescription drug coverage is only one element of the
undesirable economic effects of Medicareï¿½s outdated coverage. As
health care capabilities have risen over time, the benefits and the
costs of changes in treatment have been particularly great for
seniors and persons with disabilities. But because Medicare benefits
have not kept pace, Medicare beneficiaries spend on average over
$3,100 a year out of pocket on major medical care, and this spending
is rising much faster than inflation. Medicare beneficiaries also
face a significantly higher risk than other insured groups of very
high out-of-pocket expenses.
Because beneficiaries have inadequate options for making this
spending more predictable, they can find it very difficult to budget
their often-fixed retirement income effectively. Much of the private
prescription drug coverage available to seniors today includes
spending caps, and many seniors do not have the opportunity to
purchase prescription drug coverage that protects them from high drug
expenses at a reasonable premium. Moreover, seniors without good drug
coverage are much more likely to pay full retail prices for
medications, in contrast to the significantly lower prices available
from manufacturer rebates and pharmacy discounts to virtually all
other Americans with modern health insurance. Even for covered
benefits, supplemental private ï¿½Medigapï¿½ insurance that fills in
substantial copayments and coverage limits is virtually essential,
because Medicare includes no stop-loss protection, and the copayments
are large. For example, the copayment required for a hospital episode
is over $800, and that for many major outpatient procedures is almost
$100. Physician services generally have copayments of 20 percent.
Fewer than half of all seniors obtain coverage through Medicaid
or a supplemental insurance policy offered by a past employer as a
retirement benefit. Because of these coverage gaps, one-quarter of
beneficiaries purchase individual Medigap plans, which must conform
to standards developed over a decade ago that require first-dollar
coverage in order to get reasonably complete protection against
high expenses. Consequently, premiums for individual Medigap
policies are substantial, accounting for a significantly larger share
of the out-of-pocket expenses of the average Medicare beneficiary
than prescription drugs, and they have been increasing rapidly:
premiums for the most popular standardized Medigap plans rose more
than 20 percent between 1997 and 2000. In addition to being costly
for seniors, such first-dollar coverage results in billions of
dollars of additional utilization in the Medicare program each year.
The coverage gaps in Medicareï¿½s required benefit package, and the
rising cost of the supplemental coverage that is essential to fill
those gaps, are among the reasons why many Medicare beneficiaries
prefer private insurance plans. Such plans, which can compete for
beneficiaries through the Medicare+Choice program, typically have
been able to offer more comprehensive coverage, including
prescription drugs, for far less than the combined Medicare plus
Medigap premiums that beneficiaries must pay in the traditional,
government-run Medicare plan. (These premiums now exceed $150 a month
and are often much higher.) However, after several years of rapid
growth, enrollment in private plans has begun to drop significantly.
An important contributing factor is the ``minimum update'' for
private health plan payments imposed by the Balanced Budget Act
beginning in 1998 for most areas in the country with high private
plan enrollment. Because the payment updates are now limited to 2
percent a year at a time when private health insurance and Medicare
costs are growing much more rapidly, Medicare's contributions to
private plan premiums in these areas are diverging from the costs
of providing coverage. Poor prospects for reimbursement, coupled with
the Medicare+Choice program's substantial regulatory burdens and the
requirement that the private plans provide coverage that actuarially
meets or exceeds Medicare's unique and uneven benefit structure, have
led a number of private plans to pull out of the program. Those that
remain have instituted substantial increases in premiums and
copayments. Meanwhile the options that have proved most popular
with nonelderly Americans--preferred provider plans and
point-of-service plans, which provide a balance between the savings
possible in tight managed care networks and the flexibility of
treatment options in broader indemnity plans--are virtually
nonexistent in Medicare. As a result, Medicare beneficiaries are
headed toward having few options beyond a single outdated benefit
package, at a time when the Medicare program desperately needs
innovation in coverage to improve quality and reduce costs.
By contrast, employees of many private firms and of the Federal and
State governments, as well as many Medicaid and SCHIP beneficiaries,
are able to choose from a variety of health plans that offer a range
of options in terms of breadth of coverage networks and out-of-pocket
payments. In turn, competitive choice provides incentives for health
plans to reduce costs and adopt innovations in benefits or in health
care delivery that beneficiaries find worthwhile. For example, the
Federal Employees Health Benefits (FEHB) program has long offered a
range of reliable choices to all Federal employees in the country, a
work force with diverse health needs and circumstances that has
participants in virtually every urban and rural zip code nationwide
(Box 4-3). FEHB has accomplished this by providing a level of support
for premiums that is tied to the average cost of the plans chosen by
employees. Employees can reduce their health care costs if they
choose a less expensive plan, because a portion of the plan's cost
savings is passed on in the form of lower premiums. Conversely, much
of the additional cost of more expensive plans is also passed on, so
that employees who choose a more costly plan face correspondingly
higher premiums. All participating plans must meet the FEHB benefit
standards and must provide information to beneficiaries about
coverage  networks and performance on a growing set of quality
measures.
Analogous proposals have been developed in recent years for
improving Medicare's coverage options, building on the proposals
considered by the National Bipartisan Commission on the Future of
Medicare in 1999, the criticisms of those proposals, and subsequent
ideas from members of both political parties. One key concept in
these recent proposals is that of preserving Medicareï¿½s promise of
a defined set of benefits while encouraging competition between the
traditional Medicare plan and private health plans in how those
benefits are provided. As in the FEHB system, beneficiaries would
pay more for plans that used a more costly approach to provide
Medicare's required benefits, and would pay less for plans that
adopted a less costly approach.

____________________________________________________________________

Box 4-3. Federal Employee Health Insurance Plans
The Federal Employees Health Benefits program covers 9 million
Federal civilian employees and their dependents. The program allows
employees to choose from a menu of plans, including 11 fee-for-
service plans that are available to Federal employees in any part of
the country. Employees in most areas also have the option of
enrolling in a managed care plan such as a health maintenance
organization or a point-of-service plan. For example, Federal workers
in the Washington, D.C., area have a menu of 7 different managed care
plans from which to choose in addition to the 11 nationally available
fee-for-service plans.
Plans are required to offer a package of minimum benefits but may
differ with respect to the generosity of copayments, deductibles, and
other benefits. The government pays about two-thirds of the average
cost of coverage, with workers contributing the rest. Since 1999
the governmentï¿½s share has been calculated using a ''fair share''
formula that maintains a consistent contribution from the government
regardless of the plan chosen, so that the employee bears the
marginal cost of choosing a more generous plan. Workers who prefer
generous benefits are free to choose them, while workers who choose
more cost-conscious plans benefit from their lower cost.
The FEHB program provides a wide variety of coverage choices to
accommodate the preferences of a large work force that is diverse
both geographically and in terms of its health care needs. At the
same time, FEHB plans as a whole have experienced stable premium
growth that ensures that the program will remain on a sound financial
footing. The experience of the FEHB program shows how empowering
consumers to make insurance choices can result in coverage that is
both secure and flexible.
____________________________________________________________________

Some critics of the commissionï¿½s proposal have argued that any such
reforms would force seniors into private plans, because the cost of
the traditional Medicare plan would be higher. But that is not
necessarily true. For example, the so-called Breaux-Frist II proposal
could not lead to higher premiums than under current law in the
traditional Medicare plan. This is because the traditional plan
premium would continue to be determined as it is now, but
beneficiaries would face lower premiums if they chose a private
plan with lower costs than the traditional plan, and would face
higher premiums if they chose a private plan with higher costs.
Obviously, the Breaux-Frist II approach would work best in areas
where the traditional plan is the dominant plan. In areas where a
large share of beneficiaries have enrolled in private plans,
and where performance measures indicate that these beneficiaries
are receiving at least as good care as those in traditional Medicare,
using the traditional plan or any particular nonrepresentative plan
as the reference point for Medicare's support for beneficiary
premiums would be both inappropriate and potentially costly for the
government or for beneficiaries. Instead, the FEHB approach of tying
the government's support for health insurance costs to the average
cost of the plans that beneficiaries actually choose is a better
way of ensuring that savings from providing Medicare's defined
set of benefits accrue to both beneficiaries and taxpayers.
Last year the President proposed a framework that would provide
Medicare beneficiaries with better health insurance options, similar
to those available to Federal employees. Under this proposal, plans
would be allowed to bid to provide Medicare's required benefits at
a competitive price. Beneficiaries who elect a less costly option
would be able to keep most of the savings, so that some
beneficiaries might pay no premium at all. Moreover, the
President proposed using the savings from greater efficiency
in providing Medicare's current benefits to support further benefit
improvements, including better coverage for preventive care and
stop-loss protection. The President proposed to implement these
benefit improvements while retaining the option for current and
near-retirees to stay in the current Medicare system with no
changes in benefits if they prefer it.
In addition to providing reliable, modern health plan options and
better benefits for Medicare beneficiaries, the Administration has
proposed a subsidized prescription drug benefit in the context of
Medicare modernization, to help protect seniors from high drug
expenses and to give those with limited means additional assistance
to pay for needed medications. Both Democrats and Republicans
generally agree that any new drug benefit in the traditional plan
should not adopt the traditional approach to delivering care, that
is, direct fee-for-service government provision with complex coverage
rules and price controls. There is broad agreement that such a
bureaucratic approach would significantly reduce the availability
of innovative drug therapy for seniors. Instead the drug benefit
should give all seniors the opportunity to choose among plans that
use some or all of the tools widely utilized in private pharmacy
plans to lower drug costs and improve the quality of care--tools that
include competitive formularies to generate lower manufacturer
prices, pharmacy counseling, prescription monitoring, and disease
management programs.
The Administration has also proposed a Medicare-endorsed
prescription drug card plan that would provide immediate assistance
to beneficiaries without drug coverage. The drug card plan would not
be a drug benefit, nor would it be intended as a substitute for one.
Instead it would provide access to pharmacy programs that use private
sector tools like those just mentioned to reduce drug costs and to
improve the quality of the pharmacy services available to
beneficiaries. The drug discount card would be a step toward an
effective, competitive prescription drug benefit under Medicare by
giving both beneficiaries and the Medicare program some much-needed
direct experience with the private sector tools that are widely used
in prescription drug benefit plans today. It would also provide
immediate assistance to beneficiaries in obtaining lower cost
prescriptions until the drug benefit is implemented.
Better Support for High-Quality,
Efficient Care
Our current system of financing and regulating health care
providers is not geared toward recognizing and rewarding
high-quality, efficient care. For example, when poor surgical
protocols result in infection, readmissions, and additional surgical
work, Medicare pays more, not less, to the hospital and health care
providers responsible. In contrast, some private payers have begun to
pay higher quality providers more, and one can envision further
reforms in this direction, while still using risk adjustment and the
other tools described in the previous section to reward appropriate
care for patients with more complex health problems.
This section highlights some of the clear opportunities to improve
the quality of health care, as well as the promising public and
private initiatives that have begun to do so. Recent private
sector initiatives have encouraged hospitals to improve patient
safety through the use of computerized recordkeeping and other
measures, efforts that should be reinforced at the Federal level.
Government support for research and provision of information to
health care providers about the quality of their care, and about
pathways to improving care, is another element in improving the
health care system. Reforming the legal system so that it encourages
rather than discourages collaboration and sharing of information
among health providers is also a key building block in improving
the quality of clinical care.
Shortfalls in the Quality of Care
Two influential reports from the Institute of Medicine have called
attention to the serious problem of medical errors. The Institute
estimated that as many as 50,000 to 100,000 deaths each year may
be attributable to medical errors; even if these estimates are too
high, as some analysts have suggested, many avoidable deaths do
occur. However, improving quality is more than the reduction of
errors, or misuse of treatments. In the terminology of the Institute
of Medicine reports, the sources of poor quality include both the
underuse of procedures or treatments whose effectiveness has
been demonstrated, and the overuse of treatments with unclear or
harmful effects.
Many procedures or diagnoses are widely understood to provide
benefits to nearly every person who receives them, yet are underused
in practice. Examples include screening for breast and colorectal
cancer in high-risk populations, annual blood tests for people with
diabetes, and the use of aspirin and, when appropriate, beta blocker
drugs for patients with recent heart attacks. One study of
Medicare recipients, in 1997, found that fewer than two-thirds of
patients who had experienced a heart attack and had no
contraindications to beta blockers were taking them on discharge from
the hospital. In some States that rate of use was as low as 30
percent. A similar study indicated that many Americans who could
benefit from the newly developed cholesterol-lowering drugs do not
receive them. Indeed, failure to use effective treatments has been
estimated to result in 18,000 avoidable early deaths among heart
attack patients in a year.
Whereas some procedures are underused, others are overused.
One-fifth of all antibiotics prescribed in 1992 (12 million
prescriptions) were used to treat common colds and other viral
respiratory tract infections, despite the ineffectiveness (and
potential long-run harm) of antibiotics for such illnesses. A study
of coronary angioplasty concluded that the procedure was clearly
medically appropriate in fewer than one-third of cases; the remainder
were either of uncertain benefit (54 percent) or inappropriate
(14 percent). Despite important technological advances in imaging
methods for the detection of appendicitis (such as computerized
tomography and ultrasonography), one recent study showed no
improvement in rates of unnecessary surgery.
Reducing overuse of procedures is clearly beneficial for taxpayers,
who save money, and for patients, who avoid unnecessary interventions
and their resulting side effects. The potential savings from this
reform are substantial. One estimate suggests that as much as 20
percent of the Medicare budget could be saved by reducing the overuse
of care, particularly among patients with long-term chronic
illnesses. Although such savings might be offset by increased use of
valuable, underutilized interventions, the net effect of these
improvements in care would be much better value for the health care
dollar.
Health care costs are also increased by the misuse of treatments.
For example, a patient undergoing surgery may receive the wrong
medication, and as a result experience complications that result
in longer illness, permanent disability, or death. One study
estimated that as many as 27,000 avoidable deaths each year are due
to the misuse of medications. Such errors are probably most common
among seniors, who take many more prescription drugs than other
insured Americans but are less likely to have prescription drug
coverage that assists them with medication management. Even
technological advances can be undone by low-technology failures
related to poorly coordinated care, inadequate follow-up, and
resulting incomplete recovery. Investing in methods to reduce medical
errors would reduce suffering, disability, and death--and the
associated costs.
Disparities in the Health Care System
Not everyone with a given disease receives the same level of care.
The quality problems discussed above may be greater for low-income
and minority populations. For example, among women covered by
Medicare, 74 percent of white women living in high-income areas
received influenza immunizations, whereas only 51 percent of African
American women living in low-income areas did. Rates of surgery for
heart attacks are lower among African Americans than among whites,
although there is substantial controversy about the causes of
such differences. Indeed, one recent study showed that overuse of
this surgery--what is, its inappropriate use in cases where the
risks outweigh the potential benefits--was actually higher among
whites than African Americans.
These differences in utilization and quality across large
geographic areas have been documented in other cases as well.
A recent study showed a remarkable degree of variation across
States--from 44 to 80 percentï¿½in the appropriate use of an
effective pharmaceutical treatment (beta blockers) for patients who
have had heart attacks. There are also wide differences across
regions with regard to overall spending and utilization (Box 4-4).
It is intriguing that areas with the highest levels of health care
expenditure per capita are not necessarily those with the best
measured quality of care. In other words, improving quality does
not necessarily result in higher Medicare expenditure. Many cities
in the United States experience relatively high quality and low
costs.
The prescription for reducing disparities is clear in the case of
overuse and underuse of health care. Better quality care means
encouraging much more utilization of services that are often not
used in patients for whom they are clearly beneficial--and this holds
true for all races, both sexes, and all regions. Better quality care
also means moving toward zero utilization rates for inappropriate,
procedures that have no documented benefits for any race or either
sex. Where there are a range of reasonable treatment options,
patient preferences are particularly important; for example, in the
treatment of prostate cancer in men or breast cancer in women, the
``right'' level of care should depend heavily on those preferences.
The reforms in health care coverage described in the previous section
would help create an environment that rewards valuable innovations
in communicating the benefits, risks, and costs of treatment options
to patients to help guide their decisions.

____________________________________________________________________


Box 4-4. The Puzzle of Geographic Variations in
Medicare Expenditure
Despite the Federal nature of the Medicare program, there are
remarkable geographic differences in the level of Medicare
expenditure per capita. The Dartmouth Atlas of Healthcare, using
Medicare claims data under an agreement with the Centers for Medicare
and Medicaid Services, has documented net spending per capita in 1996
among Medicare enrollees in 306 separate areas of the United States.
Even after correcting for differences in age, sex, and racial
composition, spending per capita differs widely, ranging from $7,800
in Miami to only $3,700 in Minneapolis. Only a small part of these
differences can be explained by variations in underlying illness
levels.
The map below, reprinted from the atlas, shows the corrected
patterns of geographical variation in spending. The darkest areas
are those where spending per capita ranges from $5,698 to $8,862,
and the lightest areas those where the range is from $3,117 to
$4,178. (Some  areas are inhabited by too few seniors to allow
spending to be measured accurately.)

The disparities in health care utilization highlighted here
translate into large disparities in Medicare benefits across
regions and States. One study showed that average lifetime Medicare
expenditure for a typical 65-year-old may differ by as much as
$50,000 depending on the State of residence. At the same time,
quality of care appears to be similar in low- and high-utilization
regions. These differences suggest that better information on the
effectiveness of different styles of medical practice, possibly
coupled with better incentives to encourage efficient care, could
result in substantial cost savings for Medicare without any adverse
consequences for patient health.


Source: Dartmouth Atlas of Healthcareï¿½ 1999. Reproduced with
permission.
____________________________________________________________________

Empowering Providers to Improve Quality of Care
Improving quality saves lives and can save money. No one disagrees
with the objective of improved quality; the problem is creating an
environment for medical practice that gets results. A variety of new
and innovative approaches developed at both the local and the Federal
level hold the promise of improving how care is delivered. (Many of
these are described in the recent Institute of Medicine reports on
quality of care.)
A number of private sector quality initiatives have involved
aspects of health care where success can be measured objectively.
For example, a collaborative quality improvement program for the
intensive care unit at LDS Hospital in Salt Lake City, Utah,
improved outcomes for its patients while also lowering costs by
almost 30 percent. Similarly, the Northern New England Cardiovascular
Disease Study Group developed a working group that enabled cardiac
surgeons to reduce the complications of surgery at each stage of the
procedure and to reduce postoperative mortality by 24 percent. Each
of these successful programs set the goal of studying well-defined
interventions in specific populations, using clear, objective
measures of success. Initiatives are currently under way to develop
evidence on the overall benefits of implementing quality improvement
measures across an entire hospital system.
All of these efforts, and many others around the country, have
gotten off the ground as a result of provider initiatives in the
face of many institutional, regulatory, and financial obstacles. An
enormous amount of research, including the series of studies by the
Institute of Medicine, has concluded that high-quality care can best
be achieved in an environment that emphasizes and rewards continuous
quality improvement. The complexity of health care delivery means
that there are generally tremendous opportunities to improve the
coordination of care, reduce communication problems, and eliminate
many avoidable mistakes and complications that occur despite the best
of provider and patient intentions. Most of these quality
improvement opportunities are ï¿½low-techï¿½: problems that are not so
hard to solve technically, if health care providers can openly
discuss and work together to respond to the root causes of errors,
near-misses, and concerns expressed by patients and colleagues.
Applying the lessons learned from many other highly complex technical
systems, such as nuclear reactors, is a promising direction for
reducing health care errors.
The growing evidence on quality improvements indicates that
hospitals and doctors would undoubtedly benefit from such local,
collaborative efforts to improve quality. But there are many
obstacles to success today. Under the current system of medical
liability, this type of open discussion is widely viewed as carrying
substantial financial risks of malpractice exposure. Leading analysts
of quality improvement have called for modifications in medical
liability laws so that the collection and sharing of information to
avoid errors and improve quality are not impeded. Another obstacle
is  financial: under fee-for-service systems like those used in
Medicare and many State Medicaid programs, providers that improve
quality receive less reimbursement, because follow-up visits and
admissions for complications are fewer.
As noted previously, research on how medical treatments can be used
more safely and effectively in a wide variety of actual medical
practice settings is an important element of the Federal
Government's biomedical research portfolio. In addition, many
Federal programs, activities, and laws can support providers who want
to work together to improve care. Today the Medicare quality
improvement organizations (QIOs, formerly known as peer review
organizations) provide some important but limited support for efforts
by local groups of hospitals, physicians, and some other providers
to identify, assess, and improve certain aspects of health care
quality. QIOs provide some protection from malpractice liability
for their quality improvement activities. But liability protections
should be broadened to include new information generated beyond the
standard medical and administrative records, through quality and
safety improvement activities, whether or not they are actively
sponsored by QIOs.
The Administration is also developing regulatory standards for
health care information systems, to implement legislation on
administrative, clinical, and privacy standards enacted by Congress
in the Health Insurance Portability and Accountability Act. These
standards have the potential to improve health care quality, because
consistent and up-to-date information standards, coupled with privacy
rules that inspire patient confidence, will lead to more effective
use of health care information. Health care providers will incur
significant costs to come into compliance with the regulations.
However, well-designed and timely standards can provide the lead
time and guidance required to minimize compliance costs. Indeed, many
health care providers have for years faced disincentives to upgrade
their information systems until the content of the regulations
becomes clear.
Empowering Patients to Make Informed
Health Care Choices
As noted above, encouraging high-quality, efficient care requires
meaningful and reliable choices of health plans and providers for
well-informed patients. Within health plans, information about
alternatives is increasingly important for helping patients work
with their providers to make the best possible choices about
specific illnesses such as heart disease, breast cancer, back pain,
and prostate cancer. Researchers are beginning to understand the
central role that patient preferences and choices can play in
improved and cost-effective care of chronic illnesses, including
late life care decisions.  Research is also leading to better and
more reliable measures of the quality of health plans and providers,
in terms of both clinical processes and outcomes of care as well as
overall satisfaction.
Informed Decisionmaking: Better Choices, Higher Value Care
Many diseases have no single ``best'' cure or treatment. Instead
there are a variety of ways to treat the disease, each with
associated risks, benefits, and costs. For example, women with breast
cancer often face the choice of mastectomy or a combination of
breast-sparing surgery followed by radiation therapy. Both options
carry similar implications for survival for many patients. But each
has quite different implications for the patient in terms of physical
impact and the duration of treatment required, and many patients have
strong preferences about how they want to be treated.
Prostate cancer provides another example. There are tradeoffs
regarding screening for prostate cancer using the current
prostate-specific antigen (PSA) tests. Because the cancer grows so
slowly, with as much as a 10-year lag between detection and
clinical importance, the use of PSA tests among older men, who are
likely to die of a different cause, should depend on the patient's
preferences, weighing his concern about the unpredictable course of
the cancer against the unfortunate side effects of treatment, such
as incontinence and impotence. These are decisions that the physician
cannot make alone.
Many health care providers are implementing changes to enhance the
ability of patients to participate in clinical decisions. At the
Spine Center of the Dartmouth Hitchcock Medical Center in Lebanon,
New Hampshire, patients with lower back pain fill out computerized
evaluation forms regarding their goals and preferences when they
arrive, so that the staff is prepared to address their concerns
regarding treatment for their spine-related illness. The risks and
benefits of treatment options, including surgery, are explained using
a video featuring summaries of the clinical evidence as well as
balanced discussions by patients who have experienced each of the
different options. Following the implementation of this informed
decisionmaking approach, surgical rates for herniated discs fell by
30 percent, whereas those for spinal stenosis (the squeezing of
nerves emanating from the spinal cord) rose by 10 percent.  These
changes in surgical rates move in the direction indicated in the
medical literature, which suggests that the former procedure is
overused and the latter underused. Thus the program appears to have
provided patients with quality information to assist them in making
educated decisions, thereby improving their well-being while reducing
overall costs.
This patient-centered approach to evaluating health care outcomes
also provides a valuable framework for judging differences in
treatment rates by race or sex for specific ''preference sensitive''
diseases. The important message is not that treatment choices should
be the same across all subgroups of the population. Rather, when
several alternative treatments are available, patient preferences
(rather than race or geography) should govern choices. For example,
preferences for elective hip and knee surgery vary by sex, even
among patients for whom the treatment is deemed medically
appropriate. Less is known about differences in preferences by
racial identity, although differences in preferences between whites
and African Americans regarding end-of-life care have been noted.
Better Public Information on the Performance of
Health Care Providers
A growing number of private health care purchasers are supporting
informed decisionmaking by their employees by making measures of
quality available on their health plan choices and, in some cases,
on particular health care providers. These include clinical measures
of plan performance such as those now widely used by the National
Commission on Quality Assurance (for example, rates of appropriate
treatment for diabetes and immunization rates) as well as
patient-focused measures such as those developed by the Foundation
for Accountability (FACCT). The Federal Government also has a
particularly important role to play through supporting the
development of appropriate information to help patients and providers
identify and reward high-quality care. The Medicare, Medicaid, and
Federal employee insurance systems hold information on literally
millions of health care subscribers who are among the heaviest users
of the health care system. With appropriate privacy protections,
clinical studies using the data systems of these very large health
insurance programs could augment data from private payers, allowing
the construction of more comprehensive and accurate measures of plan
quality, and potentially of provider quality as well. Indeed, the
Federal Government has collaborated with private organizations in
the development and use of patient satisfaction measures (Consumer
Assessment of Health Plans, or CAHPS, measures). It is also a key
player in the National Quality Forum, a public-private approach to
endorsing reportable quality measures that are supported by experts,
consumers, and other major stakeholders.
The process of identifying appropriate measures for public
reporting is a difficult yet important one, because the measures
endorsed must be valid indicators of quality if they are to encourage
better health care decisions. Because patients are not allocated
randomly to health plans or providers, measures are potentially
biased by differences in case mix and may thus require adjustment
for risk, so that they truly reflect differences in performance
rather than differences in the health of the patient groups treated.
In addition, medical information systems are imperfect, and some
quality measures may not be captured adequately. Finally, because
many important medical outcomes (including death following surgery)
are relatively rare events, some measures may incorrectly attribute
bad luck to poor quality care. (For a more detailed discussion of
performance measurement issues, see Chapter 5.) Quality measures
that are themselves of poor quality may be worse than no measures,
if they discourage providers from taking difficult cases or if they
can be manipulated to improve measured performance. Thus, many
quality and safety measures are better used on a confidential basis,
as part of the internal quality improvement programs described in
the previous section. As measurement methods and data systems
have improved, however, a growing number of quality measures have
been developed and are becoming widely used for public reporting by
employers, States, and the Federal Government.

In addition, as mentioned above, some private purchasers now reward
better measured performance with higher reimbursement, at least to a
limited extent. Some insurers and purchasers include an incentive
payment for achieving high scores on certain validated quality
measures. Others have begun to use quality measures to influence
their selective contracting with providers. For example, the Leapfrog
Group, a consortium of more than 80 Fortune 500 corporations and
other large institutions, has developed guidelines for contracting
with hospitals by establishing a growing set of specific
performance standards. The initial recommended measures for
contracting include high numbers of certain surgical procedures
(because hospitals that perform a higher volume of many complex
procedures achieve better results), the use of computerized
recordkeeping (because computerization helps reduce medical errors
and misuse of care), and the direction of intensive care units by
physicians specializing in intensive care.

Fulfilling the Promise of Medical Research

Developing an economic and institutional environment that
encourages continued technological advances is a critical goal for
the coming decades. As part of this environment, direct Federal
support for an increasingly broad range of biomedical and related
research is essential. The value of this research is evident in the
medical progress witnessed over the past several decades. In large
part because of active support by the National Institutes of Health
and other Federal agencies, biomedical knowledge has grown rapidly,
encompassing dramatic advances in understanding basic biological
processes, identifying the pathology of specific diseases, and
developing effective treatments. The decoding of human genome through
public and private support is but one recent example of pioneering
research that will lead to innovative prevention and treatment
approaches.
The Benefits of Biomedical Research
The past several decades have seen remarkable gains in longevity
and reductions in disability. One of the most striking examples of
technological progress in the treatment of illness is that for
coronary heart disease (CHD). Since 1970, mortality from CHD has
been declining between 2 and 4 percentage points a year on average,
with overall rates falling by about 40 percent since 1980
(Chart 4-3). Although primary prevention has been an important
contributor, most advances in cardiovascular health care are due
either to innovations in mechanical treatments to improve blood flow
to the heart (such as bypass surgery, newer and less invasive
angioplasty procedures, and special wire stents to help hold diseased
vessels open) or to pharmacological treatments (such as beta blockers
and antihypertensive drugs to reduce the heartï¿½s work load, and
thrombolytic ''clot busters'' to open up blocked vessels during a
heart attack).
These improvements have not come without cost, which raises the
critical question, in light of generally rising expenditure on
medical care, of whether the increased costs are worth it. The
answer, at least in the case of heart attacks, appears to be yes.
One recent study concluded that the improvements in survival after a
heart attack more than compensated for the increased financial costs.
In this case, the money was well spent. Even though annual
expenditure on cholesterol-lowering drugs is well into the billions
of dollars, they have been proved to be highly cost-effective for
many patients and have contributed to the improved life expectancy
and better functioning of Americans today.
Such examples are not limited to heart disease. Chart 4-4 displays
the rapid improvement in 3-year survival rates following the onset
of an opportunistic infection signaling AIDS infection. Even though
the new treatments developed to prevent AIDS complications are quite
costly and have many side effects, these survival improvements
suggest they are well worth the cost.  As another example, new
medications for depression have similar efficacy with fewer side
effects, resulting in better adherence to treatment, better
real-world effectiveness, and a reduction in the net cost of a
remission. In addition, the availability and ease of use of these
medications have contributed to a doubling in the rate of treatment
of depression, increasing the economic benefits. Medical advances are
doing more than just keeping increasingly frail elderly people alive:
a recent study suggests that rates of disability among the elderly
population have actually declined in recent years, probably because
of avoided complications and better supportive care for chronic
illnesses. We should remain aware of the distinction between long
life and long, healthy life, but for the present, advances in
medical technology seem to be accomplishing both.






These studies are part of a growing body of evidence that, for a
wide range of diseases, the additional money spent on treatment is
more than offset by savings in direct and indirect costs of the
illnesses themselves. Indirect costs include lost productivity
and, especially, poor health, which people are clearly willing to
pay to avoid. Stated differently, because the quality-adjusted cost
of treating many diseases has fallen, health care has become more
productive over time, even as absolute costs are rising with greater
use of more intensive treatments.

Many Unanswered Questions About Existing
Medical Treatments
Although these gains are impressive, there is still much to learn.
Cardiovascular disease is the success story of modern medicine: a
plethora of articles have demonstrated the value of different
treatments compared either in isolation (drug treatment versus
invasive cardiac surgery, for example) or in combination. Thus
conclusions about rising productivity for cardiovascular care are
the best documented, with literally thousands of clinical trials
and epidemiological studies. Yet even in this area, substantial
opportunities for further productivity improvements appear to exist.
For example, in one recent study a large share of the treatments for
coronary artery disease performed were judged to be of uncertain
value based on medical expert reviews. Other examples of
opportunities to improve the quality of cardiovascular care were
discussed in the previous section. The situation is even cloudier in
the treatment of other chronic diseases, where the evidence-based
science is much sparser; here physicians have a less extensive
knowledge base to draw upon. For example, on chronic lower back
pain--an extremely common condition--no evidence is yet available
from large randomized trials on the benefits of surgery versus
medical management and supportive care, although one trial is
currently under way. It is also more difficult to determine the
effectiveness of many screening and preventive treatments. Better
diagnostic methods often result in the identification of earlier or
less severe illness that would have been overlooked before. Thus
when previously ''subclinical'' cases with relatively good outcomes
are added to the population diagnosed with the illness, survival
rates may appear to improve, even if treatment methods have not
(Box 4-5). In addition, clinical trials of preventive treatments are
often prohibitively expensive, because they require very large
enrolled populations and take many years for effects to be detected
with confidence.
Furthermore, the effectiveness of specific treatments often varies
substantially across population subgroups. For example, it is just
now being understood that the effectiveness of cholesterol-lowering
drugs depends significantly on the characteristics of the patient. As
we develop a clearer


____________________________________________________________________


Box 4-5. Survival Rates and Mortality Rates
Survival rates for breast cancer have risen dramatically. Whereas
in 1950-54 the 5-year survival rate was only 60 percent, by 1989-95
it had risen to 86 percent. This improvement is in part the result of
important technological innovations in the treatment of breast
cancer; nonetheless, these 5-year survival rates probably overstate
the actual gains. The reason is that the detection of breast cancer
has also improved dramatically: current technology is able to detect
much smaller nodes than could be identified before, which may or may
not develop into cancerous sites. Thus, improved 5-year survival
rates reflect several phenomena. First, more women are being
diagnosed, some of whom might not have developed clinically
significant cancer during their lifetime. Second, more diagnoses are
occurring at an earlier stage of the disease; this means a higher
likelihood of surviving 5 years after the initial diagnosis,
independent of improved treatment. Third, treatment is actually
producing better outcomes. Unfortunately, most of the measured
gain in survival has occurred because more women have been diagnosed
at an earlier stage of the disease.
The story for prostate cancer is similar. Older men are
increasingly aware of the risk of prostate cancer, and the use of
PSA tests to detect the disease has expanded rapidly. This has led
to a 190 percent increase in the rate (per thousand men in the
population) diagnosed with prostate disease, and survival rates have
improved from 43 percent in 1950-54 to 93 percent in 1989-95.
Unfortunately, the number of deaths due to prostate cancer per
100,000 men in the population (that is, the mortality rate) during
this same period actually rose. Again, the improvement in survival
rates primarily reflects earlier diagnosis rather than significant
improvements in treatment.
Because of this discrepancy between 5-year survival rates and
mortality rates, there is controversy among clinicians and medical
researchers about the benefits of universal screening for prostate
cancer, particularly for older men. The reason is that prostate
cancer typically grows quite slowly; the median time between
detection of prostate cancer through the PSA test and the ability to
detect it clinically is about 10 years. Men may have prostate cancer,
be entirely unaware of it, and die of something entirely different.
Both prostate cancer and breast cancer hold promise for substantial
technological breakthroughs that would reduce mortality rates, just
as they have for coronary heart disease. Until that time, management
of the disease can benefit from a better understanding of the
treatment options available to patients.

____________________________________________________________________

understanding of the genetic and molecular mechanisms of diseases,
treatments are likely to become even more tailored to individual
circumstances. All of these examples suggest that better scientific
knowledge, including more information from both randomized clinical
trials and large-population studies of actual practices, can lead to
substantial productivity improvements through more efficient use of
the many medical treatments available today. These improvements in
productivity can be facilitated by developing systems to disseminate
information about the value of different interventions--their
benefits, risks, and costs--and by developing better electronic
health records with effective privacy protections. Providing
patients with better information about the true value of different
treatments, coupled with stronger incentives for patients and
providers to use approaches of demonstrated value, will help ensure
value and productivity in health care in future years.


The Role of the Federal Government in
Supporting Research

The impressive improvements in the health of Americans over the
past several decades have not occurred in a vacuum, but arose
because of work--much of it collaborative--by government, private,
and charitable organizations in support of basic research, clinical
testing, and product development. The health care system of the
future will need to preserve and encourage this product development,
through direct support for research with potentially broad
applications, and through the protection of patent rights, to help
turn promising new research insights into treatments approved for
clinical use. The government can also provide critical support for
improving our knowledge of how to use existing medical treatments
even more effectively. Follow-up clinical trials often find that
medical treatments that are beneficial for the average patient in a
population may have no beneficial effects for some subgroups and may
even cause them harm. There may be insufficient private incentives to
explore which of the many types of patients--younger, older, sicker,
healthier--with a given clinical problem actually benefit from a
treatment, yet this understanding may have important implications
for the best treatment decisions for individual patients and for the
costs of public and private health insurance programs.
In addition, research on the underuse, overuse, and misuse of
treatments has benefits that extend across all who pay for health
care, and as a result, individual payers may underinvest in research
to improve health care quality and safety. Thus the Federal
Government should provide support for research using population data
on health system performance and public health. This should include
support for medical information and privacy standards that allow
clinical data to be pooled for research and public health purposes.

Conclusion: Fulfilling the Potential
of 21st-Century Health Care

The American health care system stands at a critical juncture. The
gains in medical productivity of the last 40 years have been
tremendous; the next 40 years have the potential to bring even more
valuable advances. Promoting flexible, market-oriented care that
responds to the diverse needs of patients is increasingly crucial
to improving the well-being of all Americans. But health care costs
are also rising rapidly, and enormous opportunities exist to increase
the value of health care and improve health insurance coverage.
Addressing these fundamental problems and fulfilling the potential of
our health care system will require innovative Federal policies to
help Americans get the care that best meets their needs, and to
create an environment that rewards high-quality, efficient care. To
meet this challenge, Federal policy must rely on market mechanisms
to encourage our health care system to identify and reward
high-value treatments, while reducing wasteful spending on treatments
of little value. It must harness the benefits of competition for the
well-being of all Americans.
Flexibility to respond to rapid changes in medical treatments and
the changing needs of patients is crucial. A bureaucratic system that
fails to respond to patient needs or that is slow to embrace new
technological developments is not the appropriate foundation for the
future of American health care. Nor is a health care system that
creates perverse incentives, rewarding the underuse of effective
treatments and the overuse of ineffective ones while penalizing
providers who seek to practice cost-effective care. Instead the
Federal Government should improve coverage options in public programs
like Medicaid and Medicare. It should ensure that Americans with
limited means or high health care needs have the opportunity to
participate in mainstream health plans, through refundable tax
credits and strategies to increase participation in health insurance
markets. It should support both biomedical research and health
services research, to improve our understanding of disease, develop
new treatments, and improve the quality and value of health services.
It should encourage the development of better information on the
quality and outcomes of care. And it should support an environment
for medical practice that encourages high-quality, efficient care
that meets patient needs. The need to empower patient choice and
enhance market-oriented incentives calls for government policies that
move away from detailed top-down regulation and one-size-fits-all
government-run programs, and toward ensuring that all Americans
have innovative health care options.
These changes in our current system are likely to affect both
patients and providers. As the health care sector continues to
grow, it becomes increasingly important to encourage new medical
options that are worth the cost to consumers. Economic theory
suggests that those critical decisions should generally be made by
those with the best information and the most direct stake in using
that information appropriately: the patient and his or her medical
providers, not government or insurance plan bureaucrats. But economic
theory also suggests that the ability to make these decisions should
be paired with responsibility for their consequences, both for health
and for medical costs.
Decisions about health care and health care systems, for both
providers and consumers, require not only good information but also
financial responsibility. Medical providers have a responsibility, as
well, to assist patients by examining their own practices through
the unflinching analysis of errors when they occur, and by
reexamining long-held beliefs about the standard of care in light of
new evidence about treatment effectiveness and costs. Already, case
studies of both private payers and public plans around the country
indicate what these efforts can achieve. Public policy should
encourage these promising trends.
Finally, the Administrationï¿½s overall economic policy is a critical
factor in improving our ability to provide high-quality care. Rapid
economic growth in the mid- to late 1990s helped keep the rise in
health care costs roughly in line with growth in Americans'
earnings.  Uninsurance rates declined in 1999 and 2000, in large
part because of the increased takeup of private, employer-provided
health insurance, which, thanks to productivity increases, was
becoming relatively less expensive as a share of compensation.
Encouraging rapid economic growth not only will help keep private
health insurance more affordable; it will also provide a growing
revenue base for Medicare and other Federal programs.
Economic growth is not enough, however. A growing body of research,
confirmed by many examples from the public and the private sectors,
suggests that we can do a much better job of allocating medical care
resources both efficiently and equitably. Providing competitive
choices for all Americans, and meaningful individual participation in
those choices, is the best way to encourage needed innovations in
health care coverage and health care delivery. Improving the
information available to guide choices, taking steps to help
individual patients and providers use that information effectively to
provide patient-centered care, and making a range of additional
policy changes that create an environment of medical practice that
encourages innovation and high-quality care will help ensure that
health care remains one of the most dynamic and productive sectors
of our economy.