Equality, Efficiency, and Market Fundamentals: The Dynamics of International Medical Care Reform PDF

Equality, Efficiency, and Market Fundamentals: The Dynamics of International Medical Care Reform. Citation Cutler, David. 2002. Equality, efficiency, and market fundamentals: The dynamics of international medical care reform. Journal of Economic Literature 40(3): 881-906. Published Version http://d...

Equality, Efficiency, and Market Fundamentals: The Dynamics of International Medical Care Reform. Citation Cutler, David. 2002. Equality, efficiency, and market fundamentals: The dynamics of international medical care reform. Journal of Economic Literature 40(3): 881-906. Published Version http://dx.doi.org/10.1257/002205102760273814 Permanent link http://nrs.harvard.edu/urn-3:HUL.InstRepos:2640584 Terms of Use This article was downloaded from Harvard University’s DASH repository, and is made available under the terms and conditions applicable to Other Posted Material, as set forth at http:// nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAA Share Your Story The Harvard community has made this article openly available. Please share how this access benefits you. Submit a story. Accessibility Journal of ricononnc Literattirc Vol. XL (SqAemher 2002) pp. 8HI-906 Equality, Efficiency, and Market Fundamentals: The Dynamics of International Medical-Care Reform DAVID M. CUTLER' 1. Introduction AustnUia and New Zieiiland, support is 19 per- cent and 9 percent respectively. Granted, I s NO COUNTHV are people particularly happy with their health-care system. In a survey ol people in ficveial countries, Karen health care is a diffieult issne for societies. Bnt why such great discontent? Medical care is snch a problem, I argue, Donelan and colleagnes asked respondents to beeanse it is fundamentally a setting of con- react to the statement: "On the whole, the ilicting goals. Methca! systems developed heLilth system works prett\' well, and only mi- with clear equity considerations. In most de- nor changes are necessary to make it work veloped conntries, universal insurance cov- better" (Donelan et al. 1999). In the United erage was designed to guarantee equal ac- States, only 17 percent of people agree with cess to medical care for all. Solidarity in the statement; 83 percent perceive the need health care dictated no rationing by price. for "fimdamonta! change" or "complete re- building."" In Canada, with universal insur- The classic tradeoff in economics is be- ance coverage and medical spending as a tween equity and efficiency, and this shows share of CIDP at 70 percent ofthe U.S. level, up in medical care. Efficiency was not a only 20 percent ol people agree with the great concern when health systems were es- statement. In the United Kingdom, with tablished; conntries were content to have in-.spending us a share of (iDP at hall the U.S. efficient medical-care systems provided they le\ el and overall health nieitsures just as good, treated all equally. only 25 percent agree with the statement. In But the equality-efficiency balance has been thrown into conflict by the fnndamen- ' Department ol FLConomics. Harvard University, tals of the medical-care market. Medical aud NBER. I am graletn! to Monica Sinf^luil lor expert eosts have increased rapidly over time, as researcb a.ssist;uice. to Jobn McMillan and tbree anony- technological change has expanded the ea- nions reterees tor belpfnl comments, and to tbe pability of medicine. Since 1960, medical National Institutes on Aiding lor researcb support. - Tlic otber response.s ure: "There are.some good care has more tban doubled as a share of tilings in our health-care system, but lundamental GDP. The result of this technological change fhanecN are needed to make it work better," and "Our is that govennnents face increasingly severe heidtli-care sy.stein lias so mucli wrong witb it that we d to coiripletely rebuild it." finaneing erises. Many countries can no 881 882 Joutiial of Economic Literature, Vol. XL (September 2002) lotiger afford the coiiimitnient to complete tetns may restrict access to some pro\'iders. equalit)' tliat they once coiikl. One way that money is saved in medieul eare The Rrst response of most countries to the is to limit the providers one contracts with, problem of rising costs was the enactment of and n.se the exclusiou power to negotiate regtilatoty limits on costs. These hmits were lower prices. But abandoning the commit- incrcLisingly pre\a]ent in the 1970s and ment to equality" of access is not easy. As a re- 1980s. Govemtnents reduced provider fees sult, there has been great reluctance to tise and rationed access to medical technolog)'. competitive measures to their fullest extent. Cost growth slowed quite a bit. Compared Many countties are tiow exploring the proper to the United States, which never had wide- scope and applieation of incetitives in med- scale limitations, medical costs in other de- ical care. How couutries resolve this debate veloped countries teli from about 90 percent will have major implications for the worlds of the U.S. level as a share of GDP to about niedical-eare systems for decades to come. 65 percent of tliat level. Further, health out- In this paper, I trace tlic histoiy oi interna- comes did not seetn to stiffer. A decade into tional niedical-eate reform and lay out the is- these rationing systems, overall satisfaction snes today. I begin in section 2 with a discus- with medical eare was higli. sion ofthe birth ol ttuiversal systetns. Section But recent years have made the regulatoiy 3 then examines the move to controls and solution increasingly less attractive. The rationing. Seetion 4 considers the effects of mareli o( tcchnologv' has continued, even in expenditure constraints on the prtnision regulated systems. Mediciil-care cost growth of medical eare. Section 5 discusses the resnmed when expenditure controls were not problems with rationed systems, and section 6 actively being tightened. Further, cost con- examines the new wave of reform. trols have nuide the lack of efficiency more noticeable. Waiting lines and access testric- 2. The First Wave of Hectlth-Care Refomi: tions have become increasitigly important is- Universal Coverage and Ecfual Access sues as the constraints increase in intensity. As a result, the regulatoiy solution to med- The late nineteenth centurv' saw the be- ical care is cotiiing tmder disfavor. In many ginnings of health insurance in most devel- countries, there is an incipient movement oped countries.'^ Mutual aid societies, or away from regnlation arid towards market- sickness fimds, were formed for some work- based solntions to medical-care problems. ers, In some coutitries, snch as Geriuauy,"* Countries are introducing competition into the development was spurred by the central medical care and in some cases providing in- government. More frequently it took place centives for people to ttse less medical care ill the pri\ate sector. and to choose less-expensive health insurance But even ;is late as \\'orld War 2, access to plans. Providers are being asked to consider medical care was not a paitieularly high prior- costs in their care decisiotis as well. it\' for tJie public sector. In part, the desire for Iiieentive reforms bring the potential for '^ M("cliail aiR' is (.lifft^re'iit in cle\'flo[>ed and dcvt'lop- cost savings withottt painful pulilie cuts. That ing countries. My ston- is largely one of rich, developed countries, where generous insurance systeuis arc af- is why countries are attracted to them. But fordable and desirable. Thus. I aniilyze the OECID incentive reforms bring conflict as well, countries, paiiicnlarly the CiT, Priee-govenied systems are not as equitable In his ijuest for riation-iniikliiig in the late 19th ceii- tun, Bismarck feared that tniddle-cliLSS CJeniiaus would as the older systems they replace. The poor snpport sofiiJists n\'er the monarchy. He thus introduced do not have the sauie access to medical care a series of.social insurance programs—most prominentlv as the rich when prices are used to ration old-age insurance and he;iltli insurance—to gi\'e the niitl- dle-cliiss a stake in the snr\i\;il of the govenmient, David care. Fttrther, less-healthy people may suffer Cnller and Hiehiud Johnson (21H)I) disenss ihe biitli of compared to the healthy. And incentive sys- sociiil insurance progranLS in more detail.  Cutler: International Medical-Care Reform 883 medical insurance was limited because tliere (1958-61), tbe Canadian.system (1966-71), wiLs little that medical care could do foi" sick and tbe Frencb system (1967). In all of tbese people. Panl Starr (1982) traces the tnuisfor- conntries, universal coverage was tbe cnlmi- mation ol the American medical system. Starr nation of many years of partial coverage and notes that medical knowledge was poor in this government subsidies for insurance. More period, ancl it was not until the mid twentietli recent universal systems were finally centnrv' that tlie medicii! profession was seen acbieved in Italy (1978) and Germany, al- as a significant laetor in helping to cure dis- tbougb in both cases coverage rates were ease. In atldition, medicid insiiranct^ was rarely veiy bigb just prior to tbe universal legisla- high in families' economic priorities beeanse tion (Milton Roemer 1991). Tbe only C7 niftlic'ul costs were not particularly variable. conntnwitbout a universtil bealtb insurance With little to do lor sick people, the financiiil program is tbe United States, altbough it risk dissociated with being siek was low. Tbe in- does bave a program for tbe elderly surance that was available for sickness fre- (Medicare) aud a program for the poor qnently covered lost wages, not medical costs. (Medicaid). Indeed, within the OECD World War 2 cbanged the situation sub- (prior to its recent expansion), only Turkey stantially (Starr 1982). Advances in penicillin and tbe United States were witboiit nniver- and other antibiotics convinced people that sal insurance coverage. medical care was Viilnable. Conntries wanted Beyond jnst desiring universal coverage, to reward tbemselves for years of strnggle. countries wanted to ensure that tbe poor Qnasi-socialist governments elected after the bad tbe same access to medical care as tbe war wanted to expand tbe role oftlie state in ricb. Medical care was perceived as a rigbt, tbe provision of basic needs. The result was a not a good, and markets were not looked major emphasis on expanding health insur- upon witb favor. For example, tbe Beveridge ance coverage. Table 1 sbows tbe creation ol Commission stated. "From tbe standpoint of national medical-care systems in G7 eoim- Social Security, a bealtb serviee providing tries.'^ Tbe lirst post-war reform was in tbe fnll preventive and cnrative treatment of United Kingdom. The Beveridge Report of eveiy kind to every citizen without excep- 1942 delineated tbe inadequacies of tbe tions, witbout remuneration limits and witb- prior system aud recommended a goal of na- ont an econoune barrier at any poiut to delay tional bealtb insurance coverage.*"" Tbis goal recourse to it, is the ideal plan" (Part VI, see. was met in 1946, witb the passage of tbe 437). Similarly, tbe Canada Healtb Act of National Ilealtb Sendee (NHS) Act; tbe 1984 stated. "It is bereby declared tbat tbe NIIS began formal operation iu 1948. priniar) objective of (^ianadian healtb care Tbe Britisb system was followed, some policy is to protect, promote, and restore tbe years later, by tbe Japanese system pbysical and mental well-being of residents of Canada and to facilitate reasonable access ' Nniricrons cl;itu soiirfes were n.sed in creating tbe to healtb services witbout fniancial or otber tiilile.s ol"conntr\' features. Tbe O E C D (19^51 and barriers" (cb. 6, sec. 3). Roenier (I9i)l) ]i;i\e nnit-li inlornmtion, along witb cite.s to otlu'r articles witb more lietail.s. Tbese sentiments bad fundamental impli- '' In 1941, an iiiterdcpartTnciitjil connnittce on Social Iiisinance and Allied Senices w;i.s appointed to.survey cations for tbe design of medical-care sys- the existing schenie.s ol social in.suranee. Tbe eoniinis- tems. Tbey led medical systems to be ex- sioii made a "diagnosis ot want" by snr\ eying conditions tremely generous iu covered services aud ol liie in a nnnihcr ol towTis in Britain. Tbe Beveridge Report ci)nclnded that abolition of want required a re- low in required cost-sbaring. At least tbis distribntion ot ineonic tbrougb scK'ial insuraiicc and by was true for acnte medical care, wbicb tvpi- taniily Tieeds. Tlif report rfconiuiended a (. oniprchcn- eally aeeounts for about 70 percent of total sive national health service to provide lull ai'ces.s to all spending. Table 2 sbows tbe cbaracteristics beneficial treatments without economic barriers (Beveridge t942>. of universal bealtb insurance systems 884 Jotimal of Econotnie Literature, Vol. XL (September 2002) TABLE ] TUECREATU)\ OF UM\'i:ii,s,\i,Cu\L:h,\(;E SVSTKMS Iiistor\' of Insurance Coverage Canada 1947: First provincial health insurance program 1966: Medicare established 1971: Last province enacts Medicare, France Late 19'" centur\: Loeal sickness timds for certain workt^i\s 1928: Compulsory liealth insurance for low-wage workers in certain industries 1967: National insurance tund for salaried workers: agricultnnil and self-employed covered by other funds 1978: Universal coverage achieved. CeiiTiiinv 1 SS.3: Industrial workers u1th low wages covered fiy sickness fuiuLs 1981: 90% coverage achieved, (Coverage remains at approximately 9()% today. Italy Post-W'W'II: Mutual aid societies converted to local branches of national insurance program (by 1970s, 90% coverage) 1978: National heallh service created. 1922: Health Insunmce Law covered some workers (extended in 1938) 1958: National Health insurance mandated 1961: All local go\eninients implement. United Kingdom 1911: Maimal workers and low-wage w{)rkers covered Coverage increased over time: 1946: National health insurance pas,sed 1948: NHS implemented. United States 1965: Medicare and Medicaid created. around the 198()s and early 199()s." In al- Furthet; there were few restrictious on us- most all countries, covered benefits were ing covered seiMces. In all countries, pa- very generotts. It is easier to report the ser- tients had free choiee of primary care vices excluded from coverage than the ser- providers, and cost-sharing for covered ser- vices incktded. Excluded services iueluded vices was minimal. In many countries dental care in some countries, visiou and (Canada, Cermany, Italy, and the United bearing aids, and oceasionally otttpatient Kingdom), access to some or ail physieians prescription dnigs. In countries where these and hospitals is nearly free. Among these services were excluded as a genera! rule, coimtries, only Italy has any cost-sharing for sueh as Canada and the United States, the specialist physicians, but the cost-sharing is pnblic set-tor sometimes covered the costs quite modest. Prescription drugs are some- for the poor. Indeed, some countries had what less well insured but often still covered. stieh generous services that they covered spa Three of the conntries (France. Japan, betiefits (Germany). and the United States) have more extensive cost-sharing. In France, coinsnrauce rates ior pliysician senices are 25 pereent, al- ' The United States row in ta!)Ie 2 reports the provi- sions of the Medicare program, Medieaid programs thongh 80 percent oi the population has stip- were more generou.s at tnis time. plemental itisttrance to cover the pliysieian  TABLE 2 Tin; !>! HKMTII I \ S L K.-\M:E SYSTEMS AHOIM.) 19S0 Demand-side SiippK-sidc Cost Sharing For:' Exclusions Primary Oulpati507aid h\- iia\in^ their beds Blendon et al. (1990) present results from filled, they are eneoiirageii to keei) ptvjple there for common surveys in 1990, asking people in nnich longer than necessarv. And if (hose beds are oc- nine eotmtries to rate their health system us- cupied by people who are not so siek. then the hospital inanajfeiTient figures it is so much the hetter hecanse ing the qttestion presented in the iutroduc- they require less care and atteiition. Bnt meanwhile, tion. Figtire 3 shows the relation between people who really need it are.stranded without help. the sbare of people who were satisfied with People often have to wait np to twenty davs in the hos- pital (or tests to fie done, because the labs are only the healtl) system and per-capita spending open fonr hours a day. So they stay there occupying a ou medical care. People in the United States bed that could fie nse)uceru and, to some extent, control outj^iatient phiir- about adverse selectkni limited the extent to maeeutical use. Fundhoklers could keep the whicb incentives were tried at the start. surplus if spendiug was below the budget, Further, the emphasis on competition ratber provided that the money was reinvested iu than cooperation upset many. Indeed, the practice. Most general practitioners be- Britain's Labor government elected iu the came fuudholders. In addition, uiost hospitals late 1990s explicitly opposed the emphasis were inoved out of the public sector aud on competition. It reformed tbe system to a made into "tnists"—souiewhat similar to the "cooperative" model, away from the "com- uot-for-profit hospital in tbe Uuited States. petitive" model. General practitioners have Hospital tnists have iudependent governing been grouped into primar\' care groups, to bodies, which make decisions about techno- jointly manage capitation payments for tbe logical iivailabilitv ;md pricing. people tbey serve. Separating tbe purchasing of care from But the Labor government did not com- the provision of care had some real effects. pletely backtrack, and incentives have actu- Studies by Howard Glennerster, Mauos ally been strengthened in some dimensions. Miitsaganis, and Pat Oweus (1994) and For example, hospital tnists arc now allowed Carol Propper and Neil Soderlund (1998) to keep surpluses they generate, providing show that prices paid bv fundbolders ibr more incentive to limit the care they pro- iLOspital seivices tell relative to prices paid vide. Similarly, primaiy care gronps will be by non-fundholders. Conrad Harris and allowed to retain surpluses as well, provided Cileu Scriveuer (1996) show that fundhokl- they are reinvested in the practice. The ers had lower prescriptiou drug speuding United Kingdom is thus experimenting with tban did uon-fnndbolders. Bernard Dowling A balance between incentives and regula- (1998) demoustrates that waitiug times for tion, as are many other countries. patients of fuudholders fell relative to wait- ing times for nou-fundholder physicians. 7, Sttitunanj But iu other ways, the reforiu was teuta- tive. Hospital trusts were still significantly The slowness and zigzagging of reform in regulated. Public approval was required for virtually all countries reflects many factors. investment and capital decisions, aud tnists Fear of making too sudden a cbange is an could uot keep auy surpluses they gener- important brake. So too is concern uboiit un- ated. They also had an iuiplieit claim on the wanted ontcomes suob as adverse selection. public sector if they rau a deficit. As a result, And equity concerns liave played u large role the financial incentives tnists operated un- as well. Since World War 2, countries have der did not encourage much change in care taken pride in kecpiug the market out of delivery'. Tbis was reinforced by the general mediciue. Reversing this commitment is desire of regional health authorities to avoid veiy difficult. closing hospitals. Overall, while empirical Arthur Okun formalized tiie tradeoff evidence shows some salutary effects of the between equality und efficiency a quarter- century ago. Medical-care reform has that ^ Not iill of the pavments for these services come tradeoff aud more. Not only are etjuidit) and out of the same capitation amount. 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