Volume 16, Number 2 January 1993
PROCEEDINGS OF THE TENTH ANNUAL
BUSINESS ECONOMICS FORUM
U.S. Health Care: An Economic Issue
By A. Wayne Lacy
International Health Care: How Other Countries Do It
By Carolyne K. Davis
U.S. Health Care: The Role Of The Health Care
By William Toby, Jr.
Health-Care Value: A Purchaser's Perspective
By Travis J. Bowden
Health Care In Corporate America: The Coca-Cola Company's
New Approach To Today's Health-Care Needs
By C. Ron Cheeley
Put The Patient In The Driver's Seat
By Daniel H. Johnson, Jr.
The President's Health-Care Reform Proposal
By Hanns Kuttner
Regulated Competition And The Future Role Of Insurance Companies
By Terry D. Kellogg
Health-Care Reform: Hard Choices For Alabama's Future
By Carol Herrmann
Health-Care Costs And Cost Containment At Blount, Inc.
By Mary Butler
The Hospital Perspective On Rising Health-Care Costs
By William C. Bentley
Medicaid In Alabama: Problems And Prospects
By Brian W. Moore
The Economic Outlook For 1993
By Mary S. Rosenbaum
Indexed in PAIS Bulletin ISSN: 0743-779X
Volume 16, Number 2 January 1993
Table of Contents
U.S. Health Care: An Economic Issue:
A. Wayne Lacy 86
International Health Care: How Other Countries Do It
Carolyne K. Davis 91
U.S. Health Care: The Role Of The Health Care Financing Administration
William Toby, Jr 107
Health-Care Value: A Purchaser's Perspective
TravisJ. Bowden 113
Health Care In Corporate America: The Coca-Cola Company's
New Approach To Today's Health-Care Needs
C. Ron Cheeley 117
Put The Patient In The Driver's Seat
Daniel H. Johnson, Jr. . 122
The President's Health-Care Reform Proposal
Hanns Kuttner 131
Regulated Competition And The Future Role of Insurance Companies
Terry D. Kellogg 137
Health-Care Reform: Hard Choices For Alabama's Future
Carol Herrmann 141
Health-Care Costs And Cost Containment At Blount, Inc.
Mary Butler 143
The Hospital Perspective On Rising Health-Care Costs
William C. Bentley 147
Medicaid In Alabama: PrOblems And Prospects
Brian W. Moore 157
The Economic Outlook For 1993
Mary S. Rosenbaum 159
Book Review Section 165
Listed in the Bowker International Serials Database and The Serials Directory,
An International Reference Book
Published by the
School of Business
86 The Southern Business & Economic Journal
u.s. HEALTH CARE: AN ECONOMIC ISSUE?
A. Wayne Lacy"
When the issues that surround the subject of U.S. health care are examined, emotiom
often run high. Because of this, there is often a tendency to overlook many of the
economic implications of the proposals of change that frequently occur. Certainly there
are many questions that revolve around the medical-care system of this country that would
fall into moral or ethical rather than into economic categories. Not the least of these i~
the question, "Is it ethically right or just that a nation as wealthy as this one should havt
an estimated 34 million people, or about 15% of its population, not covered by some
health-care program or health insurance?" (Kaplan, 1992.) However one may feel abou!
this question, and many others like it, the answers to the questions and the solutions te
most of the health-care problems will involve enormous economic costs and adjustmentE
within the health-care industry and the economy as a whole.
The impacts will be felt by individuals, companies and the government itself, anc
cannot be ignored. They must be addressed since they involve the reallocation oj
economic resources in production, and shifting of the real distribution of income. Thert
is a great deal of evidence that the health-care system of the U.S. is not economicall)
optimal; that often, health care is not provided in an efficient manner. To the extent thai
this is true, the application of beller economic analysis can help to provide more healtr
care for less cost.
The U.S. system of health care has many positive features. It utilizes world-clas~
technology, with well-trained physicians in modern, well-equipped facilities that art
among the best in the world. It operates in a climate that generally alIows free choice oj
doctors and facilities which tends to fit the national spirit of the nation. At the same time
the system is experimenting in a wide range of delivery systems that hold promise fOi
increased efficiencies in the future (Rice, 1992).
Despite the general recognition that the U.S. health care received is of high quality
citizens are far from satisfied with the system. In a recent world survey by Aman
(1990), U.S. citizens expressed a greater need for change in health care than any majOi
developed nation except, possibly, Italy. The results of this survey are shown in Table
1. One thing clearly evident from this table is that no maller which country's health-cart
delivery system is examined, there will be a substantial amount of discontent. Canada
a country that many in the U.S. would like to emulatc in health care, had the highestleve
of satisfaction. However, even there, 38% of the people surveyed stated that fundamenta
.changes were necded in the system, and five pcrcent said the system should be completel)
rebuilt. In the U.S., by contrast, a high of 60% said that fundamental changes wen
needed, and 29%, second only to Italy, said that the system should be completely rebuilt
·Professor and Head of the Department of Economics, Auburn University a
Montgomery, Montgomery, AL.
Lacy/January 1993 87
Table 1. Changes Needed in Health Care: Views of People in Different Countries in
Country Fundamental Completely
Surveyed Changes Needed Changes Needed Rebuild System
Canada 56 38 5
Netherlands 47 46 5
West Germany 41 35 13
France 41 42 10
Australia 34 43 17
Sweden 32 58 6
Japan 29 47 6
United Kingdom 27 52 17
Italy 12 46 40
United States 10 60 29
Sources: Adapted from Amara (1990) and Rice (1992).
There are many elements of U.S. health care where the population exhibits more
, satisfaction than in other countries, however. A Louis Harris/Harvard Community Health
Plan study of consumer satisfaction in six countries indicated higher satisfaction in the
1. Waiting time for a doctor's appointment (84% are satisfied in the U.S.
versus 74% for the six-country average).
2. Best quality health care (87% vs. 80%).
3. Getting the most advanced tests, drugs, procedures, and equipment (87%
4. Personal control over decisions (88% vs. 78%).
5. Elective surgery without much delay (79% vs. 68%).
6. Minimal out-of-pocket costs (75% vs. 70%).
7. Opportunity for all to receive top quality health care, regardless of cost
(64% vs. 63%). (Rice, 1992.)
These findings seem to contradict somewhat those of Table 1. The results on Items
6 and 7 seem especially surprising. But it is possible to be satisfied in many of these
categories and still feel a need for fundamental change in the system. Also, since this
reflected consumer views, it presumably did not question those not being serviced by the
Lack of adequate medical coverage for millions of people is a principal concern about
the U.S. health-care system, but spiraling costs are another. And since these costs affect
the great majority of people, they may actually represent the strongest force for change
88 The Southern Dusiness & Economic Journa
in the system. Critics of Lhe system often point to the rise in the share of national produci
that health care has taken in recent years. These data can be seen in Table 2.
In 1970, U.S. expenditures on healLh care were $74 billion or 7.3% of GNP. It gre\\
to 9.46% of GNP in 1980 and to 12.08% in 1990 (Moberly, 1991; Smith, 1992
Faltennayer, 1992). IL is estimated that the figures for 1992 will be $809 billion or 13.4%
of GNP and that by Lhe year 2000 will be as much as $1.61 trillion or 16.4% of GNP
Some of Lhe increase is viewed as natural, the result of increased afOuence that demand~
more and better health care, the increasing average age of the population, and advance~
in technology that are more costly. On the other hand, much of the increase in cost i~
viewed as the result of excessive and costly litigation in the industry, monopoly contro
of medieal goods and services, and widespread inefficiencies in the application of medica
The share of spending on health care paid by the government through Medicare anc
Medicaid has been reasonably steady in the past few years, with some increase comin~
in the last two years. This can be seen in Table 3. In 1985, these two sources of healtl
care provided 26.1 % of all health-care spending. This declined to 25.7% in 1988 and rose
to 27% in 1990. However, the total dollar spending rose enormously from $110.1 billior
in 1985 to $180.2 billion in 1990. This represents an increase of 63.7% in five years
And this occurred during a period of moderate inflation, when the yearly average
Consumer Price Index rose from 107.6 to 130.7 (base 1982-84 = 100), a 21.5% increase
in prices to consumers.
Business enterprise in the U.S. is faced with the burden of providing ever costlieJ
healLh insurance for employees. To some companies, the health-care issue has become
a "make or break" proposition. Businesses are being forced to show more ingenuity iT
handling their benefits packages. Many will find it necessary to reduce their insurance
coverage or to make workers bear a higher proportion of the costs; that is, unless the cost~
can be better contained than in the past two decades.
As this conference opens, we are faced with many proposals to reform the health-can
system in this country. The widespread dissatisfaction with the system, as noted earlier
has made health care a hot political issue. The rising eosts to business have created ~
keen interest in cost containment by the business sector. A greater awareness of the
failure of the system to provide adequate care for all is creating a strong sympathy fo
change, even by those who are well provided for. This conference is designed to addres:
these issues. In the case of health care, we cannot separate completely the ethical
political, business and economic issues.
Thus, whatever types of arguments are made for revising health care, unless thl
economics of those arguments are made clear and plausible, they are unlikely to meet will
success. That does not mean that we cannot afford to provide health care for .all in thi:
country. Indeed, can we really afford not to? But it does mean that every proposal fo
change should be compared on a cost-benefit basis with every other proposal. An(
economic study has a great role to play.
-------~~ .-. - .
Table 2. Gross National Product and Health-Care Shares, 1980-1991 (Dollars in Billions) <::;
(1) (2) (3) (4) (5) =
Health-Care Spending as GNP Medical Care '<
Gross National Total Health- a Percentage of GNP Price Deflator Price Index ~
Year Product' Care Spending' Col (2)+Col (l)b (1982 = 100) (1982-84 = 100)
1980 $2633.1 $249.0 9.46% $ 85.7
1981 2954.1 286.6 9.70% 94.0 $ 82.9
1982 3073.0 321.2 10.45% 100.0 92.5
1983 3304.8 353.6 10.70% 103.9 100.6
1984 3662.8 392.7 10.72% 107.7 106.8
1985 4010.3 422.6 10.53% 110.9 113.5
1986 4235.0 458.2 10.82% 113.8 122.0
1987 4377.7 496.6 11.34% 117.4 130.1
1988 4900.4 546.0 11.10% 121.3 138.6
1989 5244.0 602.0 11.50% 126.3 149.3
1990 5513.8 666.2 12.10% 131.5 162.8
1991 5709.2 803.0 14.10% 134.8 (QI) 173.5 (March)
, Source: Statistical Abstracts of the United States, various years; Survey of Current Business; Economic Indicators and Health
Care Financing Review, various years.
b James R. Seldon and H. Dean Moberly, "The Escalation of Health Care Spending: Real Effect<; and Price Effects", MidSouth
Journal of Economics, li(2), September 1984, pp. 147-156.
c Updated by H. Dean Moberly.
90 The Southern Business & Economic .Journa
Table 3. Percentage of Total Health-Care Spending Paid by Government
Total Health-Care Medicare and Medicaid Percentage of Health-Care
Spending Spending Spending Paid by
Year ($ Billions) ($ Billions) Government
1985 $422.6 SllO.1 26.1%
1986 458.2 118.6 25.9%
1987 496.6 129.9 26.2%
1988 546.0 140.5 25.7%
1989 602.0 159.5 26.6%
1990 666.2 180.2 27.0%
1991 803.0' N/A N/A
• The $803.0 billion spent in 1991 represents $2.2 billion .per day. (Compiled b)
H. Dean Moberly.)
Amara, Roy, "Health Care: Some Informational Comparisons," Health Care in the 1990s:
A Global View of Delivery and Finance, 1, Blue Cross California and King's Fund
England, September 1990. Cited in Rice, The World and I, June 1992.
Faltermayer, Edmund, "Let's Really Cure the Health System," Fortune, March 23,
1992, pp. 46-55.
Kaplan, Morton A., "Health Care in America: Is There a Cure?", The World and 1,1(6).
June 1992, pp. 20-21.
Moberly, H. Dean, "Health Care for Low Income Persons: An Analysis of Demand,"
Journal of Economics and Finance, 12(1), Spring 1992, pp. 53-66.
Rice, James A., "What's Right and Wrong with U.S. Health Care," The World and L
1(6), June 1992, pp. 22-29.
Smith, Elise D., "The President's Proposal," The World and 1,1(6), June 1992, pp. 38-43.
Davis!january 1993 91
INTERNATIONAL HEALTH CARE:
HOW OTHER COUNTRIES DO IT
Carolyne K. Davis·
To put us in the context of being on campus, it's only fair that we spend a while
going to school. So, I've devised a curriculum related to health-care reform, a topic that's
on everybody's mind these days. The curriculum has a number of components to it: we
are going to study a little bit about mathematics and a little bit about English, history,
civics, philosophy, social studies, and economics.
We will start with math because it's regarded as the toughest subject. To begin with,
we need to think about billions and tril1ions of dol1ars. That's what the national
government is facing now dealing with health care-billions and trillions. The first time
I had to say a billion dollars, I didn't really have a clue how as to much money a billion
dollars really was. How much money is a bil1ion? One billion dollars is slightly more
than twelve Mount Everests if you were to pile dollar bills in one stack. That's one way
to remember it. But another way to remember it is this: If I were to hand you a billion
dollars, one at a time, one per second, how long would it take me to hand you a billion
dollars? Thirty-two years nonstop, day and night. That's what a billion is all about.
One of the reasons why there will have to be health-care reform is not simply the fact
that people in general are uneasy about the dol1ars flowing out from their pocket, but that
Medicare will be bankrupt in the year 2005 if we don'l do something differently. If
nothing else happens, we will have a trigger point where we must rescue the system by
the year 2005.
Now, let's look at the way in which the national budget is divided up. That budget
is divided up into sections with Medicare and Medicaid making up about 13% of the total.
Another major section makes up the defense budget, which clearly we can expect to see
declining. Domestic discretionary spending, which is about 15%, contains areas like
education, agriculture, and support programs. Then finally, there is Social Security. But,
we never really louch Social Security or other mandatory programs. It's no secret then
that if the budget is out of balance, the ideal place to look for something to pare away is
the defense budget. But everybody has their hands oul-it's not just health care that
wants the extra dollars that's expected from defense cuts, it's also education and some of
the other programs. And out of necessity, they begin to look back and see what else can
be reduced. They end up looking at Medicare as one of the possibilities, partly because
it is a big number.
'Doctor oj Philosophy and National Health Care Advisor, Ernst and Young,
92 The SOllthern Business & Economic Joornai
Influencing this is a strong belief that health-care providers in the U.S. need to get
their act in order. While many of us are involved in health care, and may think that we
may deserve more money, the American public reads the newspapers and, frequently, sees
headlines such as one yesterday: "Health Catheter Test May Be Overused." We
continually fmd a number of publications talking about the overuse and the abuse within
the system. The great American public is beginning to say that, "Health-care providers
ought to become more efficient and more effective and stop asking us to pay more." Get
the health-care systems back in order. That's why Congress has not been enamored of
trying to do otherwise than to try to compress the system.
We now have a national debt that's rapidly approaching $4 trillion. What is a trillion
dollars like? One trillion dollars would pay for two weeks vacation in Bora Bora for
everybody in the United States over the age of eighteen. With national government
almost $4 trillion in debt, it's no wonder that President-elect Clinton has said the economy
and balancing the budget are two very important factors. If we don't balance the budget,
we can run into severe problems. The interest on the debt keeps growing and growing.
At current trends and without beginning to pay the debt down, in forty years the interest
will be taking up the whole budget. And then we'll be nothing but a total debtor nation.
The National Debt is
more than $3.5 trillion.
$1 trillion could buy...
Two weeks at Club Med
in Bora Bora, French
Polynesia for every U.S.
citizen 1a and over.
Source: USA Tod8f
Davis/January 1993 93
Well, let's move to history-enough of math. What about history? History teaches
us some things in life. And here's a quote from a former president. "I will propose a
program to insure that no American family will be prevented from obtaining basic medical
care by the inability to pay."
Think about that for a minute. Does that sound a little bit like President-elect
Clinton? Who else might it have sounded like? Well, that was a quotation from former
president Nixon in 1971. He proposed that one of the ways to solve the problem was to
mandate that health-care insurance be picked up by the employers. That was in 1971.
He didn't get the legislation passed, as we well recognize.
The point behind this is that no president ever gets all of their programs passed. The
record for having the most programs passed was set by former president Lyndon B.
Johnson, who came out of Congress and clearly knew how to work Congress. He got
sixty-five percent of his legislative proposals passed. No matter how well meaning any
president might be, he has to deal with the fact that he has to get Congress to work with
him. And Congress may not appreciate all of the ideas that are put forward.
Let's move quickly along to English. Now, when we think of English, we think of
vocabulary. There are some new vocabulary words and terms coming along now. These
new words and terms will impact on us in the future. One of the terms we've heard
recently in this campaign has been health-insurance purchasing networks, or health
insurance networks. The idea behind these is that since small businesses do not have very
much clout, that if you pull a number of these together into one cooperative, they can
purchase insurance for a lower rate and will have the clout, then, to negotiate. Clearly,
we are likely to see such networks emerging in this decade.
Another thing that we've heard about is community-care networks. Community-care
networks is an idea that hospitals have really been fostering. If hospitals are going to
move into managed care in a fairly large, comprehensive way, then they should design
new community-care networks, making the most of the advantage of having physicians
and hospitals and home care all networked together to offer care. The difference is that
they will manage that care in a risk-based system. That, too, is important because we will
probably see new alliances within the next several years with multiple providers getting
together in a consortium or a cooperative arrangement. The difference from the past with
these networks is that they are at risk. They will have a capitated amount of money,
probably negotiated by the health insurance network, to then take the risk and to include
acute care as well as prevention and primary-care arenas.
Let's move to yet another area: philosophy. Philosophy will have a lot to do with
how we actually make our final decisions relating to health-care reform. In America, we
have some social values that are quite different from other countries'. In talking about
health-care programs in Canada or Germany, it's important to understand the U.S. social
value structure because it will impact on why we mayor may not accept the ideas that
First of all, we have a strong belief in the United States in individualism. The nation
grew out of a frontier mentality that says: let everybody alone; let them grow and do
what they want to do; let them become as successful as they want to become. This
individualism is valued very highly.
94 The Southern Business & Economic Journal
Secondly, we have a very significant mistrust of government. It's not likely that
anybody feels real comfortable when government people come to call because we don't
necessarily think they are here to help us. And that's grown out of that spirit of
individualism, the belief that we can, if left alone, find private solutions to our social
problems that will probably work as well as, if not better than, those of government.
We also have a strong belief that we are unusual, that we are creative individuals.
We value ideas like "America is a wonderful land of opportunity." But it's also a land
of abundance. We've gotten very used to the fact that we've got a lot of resources, a lot
of everything. We don't particularly like to wait because we're not used to that idea.
Our value systems like instant gratification. Witness the fact that we have a lot of
automatic teller machines. We have the birth of things like Airborne and Federal Express.
We have all of these instant kinds of opportunities. They didn't just happen overnight.
They happened because the American social values are such that we really place a high
degree of emphasis on such ideas. We also value technology. We think that high
technology equipment surely will make us better faster.
A result of that value system is that hospitals have invested heavily in new equipment.
We've created quite a hospital arms war where every individual institution has been
competing to have the latest in high-technology equipment so they can attract individuals
to come to their institutions for their care. This is quite different from the approach of
some other countries, which we will examine shortly.
Let's take a look at some of the value systems held within the health-care arena itself.
American professionals in the health-care-provider area guard quite zealously their
professional autonomy. They value highly the right to make a decision and then to carry
that decision forward. More recently, that right has come into conflict with some of the
activities that are attempting to control the overall growth in cost by having such things
as utilization review. When one scrutinizes over the shoulder of a physician who is used
to professional autonomy, there can be a lot of conflicts arising as a result.
We have seen the increased growth of the patient's right to have information, not only
about the individual's chart and the individual's health history, but increasingly they are
wanting to have infonnation about the performance of the individual institution or the
particular doctor that they are going to place their trust in. During the late eighties there
was a beginning of an attempt to design some information showing such things as
mortality data on hospitals. More recently, the state of New York has started to publish
mortality rates on individual physicians. That's been quite an interesting exercise to see
develop. I predict that others will take up such ratings. In fact, within the next four or
five years, I think we will see a Consumer's Digest that will rate hospitals, nursing homes,
home health agencies, and physicians in a meaningful way to allow the patient to make
more informed choices.
Furthermore, we will see that one of the roles of the new insurance networks will be
to demand the kinds of outcomes data and the kinds of quality of care data that individual
cooperative care institutions such as the coordinated care center will need to provide to
receive a favorable selection.
We also have a strong belief in the United States in consumer sovereignty. We want
the individual to make choices. We really believe that an individual should be free to
Davis/January 1993 95
choose a doctor, free to choose a hospital. This is unlike some other countries where they
simply tell you that you are assigned to this or that hospital.
We have a strong belief, too, in patient advocacy. Patient advocacy simply means
that we should do everything possible for that patient. In fact, we have a criterion that
says, "When in doubt, do it." Yet, it's becoming increasingly clear that if there are doubts
about this, we need to have better parameters of outcomes. We need to have practice
guidelines that sharpen the whole decision-making process so that we can, indeed, begin
to become more efficient and save money and not end up doing a lot of procedures that
perhaps are not of great value and do not add to the quality of life of an individual.
Consequently, we're beginning to see major investments by insurance fmns and others
in designing quality of life and quality of care outcome measures to help better evaluate
these kinds of decisions.
Yet, despite all of these values, we still have a belief that we would like to see an
extension of coverage across a very wide variety of necessary or needed services such as
long-tenn care, which is currently not covered except by private insurance. And, we
would like to make sure that everybody in America has the opportunity to have some
degree of access to primary-care services and to acute-care services. However, this
conflicts with our strong individualistic beliefs, and we're not totally ready to spend a lot
of our out-of-pocket money to make this happen.
Let's take a look at the economic factors. Here we shift and look at some of the
international data. We have all heard that we have a fairly large expenditure relative to
our gross domestic product as compared to other countries. These comparisons, shown
in Figure 2, use 1989 data because it was the latest available to compare with other
countries. In 1989, the U.S. spent 11.2 percent of our GDP on health care. Contrast that
with Canada at 8.6% and with Gennany at 8.2%. The share has now grown to 14 percent
in the U.S. The new 1990 data that does allow for some comparison show us that share
of health care in Germany had risen only to 8.4 percent.
But one thing is very important to remember in making the comparisons. And that
is the fact that our economy has been in a slump, while clearly, Gennany's has not been
in a slump. One of the reasons Germany has been very effective at maintaining that kind
of a low ratio of GDP is because their economy has been booming. So, it's a little unfair
to compare us to Gennany totally on just this value. And yet, I can assure you that most
people who set health policies want to do just that.
The second thing we ought to remember is that in Gennany they do not include any
of their long-term care expenditures in their health budget. That's very important. They
pay for that out of the Social Services budget, which is a different line item of their
budget. And because the health-care portion is so mixed in, they can't really extricate it
enough to give us a value figure in the OBCD data. If we could add that to the health
care figure, it probably would raise Germany's share of GDP a percent or more.
Nevertheless, we look at the lower percentage in Germany, and people who have to
make new policy decisions begin to question if we're doing something different. Perhaps
we're not as efficient as we should be, because clearly we're spending about $1000 more
per capita than the Germans and about $700 more per capita than the Canadians. So,
what is it that they are doing that we're not doing? They seem to live about as long as
we do. In fact, they even have a better infant mortality rate than we do. So we look at
96 The Southern Business & Economic Journal
other things. Perhaps we're not very efficient in the way we take care of people when
they are in the hospital. So we look at such things as the length of hospital stay.
In Figure 3 the long bar graph in the second row is Japan. Japan has no home care.
They have no long-tenn care resources or nursing homes. So, when you go into a
hospital in Japan, you stay until you're totally well. And that means you stay something
like fJIty-two days on the average. In terms of length of stay, they are not in the same
league as we. Yet, their costs are lower than ours.
In Gennany, 16.6 days is the average stay. Despite the fact that they are spending
only 8.4 percent of GDP, they have a much longer average hospital stay than in the U.S.
with about a nine-day average stay. So, why are we so much more expensive? Canada's
average stay is closer to the U.S., 13.2 days. But the U.S. is still more efficient in tenns
of length of stay. So, we have to analyze the problem in more depth. While the United
States has significantly lower number of days in the hospital per admission, Figure 4
shows that the hospital expenditures, the cost per admission, is about double that of other
OECD countries. This is true despite the fact that they stay longer than we do.
There are two factors we have found that contribute to that. One is that the U.S. has
much more high-technology equipment than the other countries do. Secondly, hospitals
in the U.S. staff differently than these other countries in tenns of FTE's per occupied bed.
This is shown in Figure 5. Our FTE's have gone up to almost three FTE's per occupied
bed. As our acuity level has increased, our staffing has increased.
The United Kingdom has 2.6 FTE's per occupied bed; Canada, 2.45; Gennany, 1.25;
and Japan 0.77. This is quite a difference in staffmg contrasted with the U.S.
When you go to a hospital in Japan, you take one of your family members with you
because you need the family member to help provide your care. They have very few
nurses and other support personnel in their hospitals.
The U.S. hospitals could staff this way if that was what people wanted. But our value
systems are different. We value the kind of hotel-like services. We value the fact that
if we put the light on, somebody comes. We grumble, as a matter of fact, if they don't
come immediately. If we had to wait twenty minutes like they do in some of these other
countries to fmd a nurse, there would be problems. Hospital administrators would agree.
They assess how well the public accepts them by looking at some of those factors. But
we could redo our hospitals and strip them down in terms of the numbers of individuals
providing care to reach a goal somewhat like Gennany or Canada. But that depends on
our value systems and whether we want to do that.
Continuing from a social-studies point of view, what else do we know about other
cOWltries' health-care systems? Most of them have a single-payer system, or in the case
of Germany, multiple-payer, but they have a single decision-making system about the rate
of increase in payments. Single-payer systems cut down on administrative expenses. If
you didn't have to bill anybody for the care, think of how many resources you would
save. If you had one single common billing fonn--or you had none because somebody
just gave you a block of money for the year, you wouldn't have to do much in tenns of
accoWlting, and you could probably strip quite a few people out of your administrative
Health Expenditures ~
Total Health Expenditures as a Percent of GDP
United Canada United Japan Germany
Source: HCFA, 1989 Ernst &Young
Average Length of Stay
UnRed Slales t=
o 10 20 30 40 50 60 til>
M ERNST & YOUNG ....
Hospital Expenditures Per Admission ~
u.s. vs. DECO Nations
Average Length of Stay HospItal Expenditures
u.s. OECD u.s. OECD
Source: OECD, 1991 • &NSf&YOUNG
Figure 5 8
FTEs Per Beds Per
United States 2.95 4.8
United Kingdom 2.60 6.4
Canada 2.45 6.7
Germany 1.25 10.8 ..,
Japan 0.77 15.7 I:
Source: 19870111, OECD,1998 DIll, HCFA, 1989 Ro
!!J ERNST &YOUNG ;:;"
Davis/January 1993 101
But in the U.S., we have multiple payers and multiple billing forms. We are hoping
to streamline that one of these days and get it down to a single form. This alone could
save us in the neighborhood of $40 million a year.
If you operate with a global budget, that is, if you are given a set amount of money
for the year, then you avoid a lot of micro-management. You manage the best you can.
Most of the European countries are into macro-management with a global budgeting
system. And we are into micro-management because we are trying to control our rate of
growth in health care. So, we keep putting out more and more regulations that try to
define one area versus another. We have fragmented control of our particular health-care
One of the major reasons why we look so different from these other countries is that
all the other countries manage capital very tightly. Whether it's Germany, Canada, or any
of the other countries, new capital equipment requires a written request to both the state
or province and the federal government to receive approval. And approvals are very
tightly controlled. They believe in strict control of technology or capital costs.
Consequently, in Canada, there are fourteen nuclear magnetic resonators for the entire
Canadian population. And we've got more than that in one major U.S. city. That high
technology costs a lot of money. It costs not only the money to buy it, but to keep people
to operate it. So, while others rely very heavily on government control of capital, we
allow health-care providers to access private capital markets. Then they have to pay it
off. And, they have to charge to meet their interest payments and pay back the loans,
which increases our hospital charges.
The Canadian system has a single payer: the government. The government collects
taxes from everybody. They put it into one gigantic fund. And then they parcel it back
to the individual provinces. The government used to pay the individual provinces fifty
cents on every dollar spent on health care. The provinces must raise their own taxes and
match this. That's how they started out back in the late forties and early fIfties. Most
recently, Canada has gotten into a crunch in their overall fiscal budget. So, what have
they done? The federal share has dropped and is now only thirty-eight cents on the
dollar. To make up the difference, the provinces now tax the people heavier. Some
provinces have now started to run out of money. Therefore, higher co-payments and
deductibles are necessary. In the last three years, the amount of co-payments and
deductibles has risen significantly in the Canadian system. The Canadians are now getting
more and more unhappy as a result of increased out-of-pocket expenses.
There is a lump-sum reimbursement by global budget that goes out to the individual
hospitals. !tis calculated on the basis of how many individuals they believe they will see
for the next year, and then some small amount of growth is given with a very definite
regulation of capital under the separate allocation system. One of the things that the
Canadian government decided a few years ago is that it's cheaper to contract with
hospitals in the United States to give high- technology care, such as coronary bypass
surgery and many other heart procedures. Ninety percent of the population of Canada
lives within a hundred miles of the border. And so it's relatively easy for them to make
a contract and much cheaper for them to negotiate these contracts rather than invest in all
of the high-technology equipment and pay all of the expensive practitioners in each and
every one of their hospitals at home.
102 The Southern Business & Economic Journal
If we could design a system for the U.S. that's somewhat like the Canadian system,
what would we do? Would we contract to send our people to Mexico for some of these
procedures? When we look at their system, we have to remember that there is a safety
valve that the Canadians use, and that's the U.S. We know, too, that when they run out
of money in their global budget, as they frequently do before the end of the year, they
stop doing anything but emergency procedures. Thus, they have longer and longer
queues, or waiting lines, for medical care.
But one of the things they do very well is they offer preventive-care and primary-care
services. They have a lot of primary-care physicians, and they use public-health nurses
to do prevention and primary care, also; this model is also like that of the European
countries, but unlike our system with its high dependency on specialist care.
How do they control the number of primary-care physicians? Why is it they have so
many more primary-care physicians than we do? Since the government controls the
budget of the hospital, they tell the hospital how many slots they may have for residencies
in each and every field. If the U.S. could control the number of residency slots, and we
could tell our hospiLals, "We're sorry, you are going to have to stop producing
ophthalmologists and heart surgeons, you have to produce more primary care physicians,"
we could emulate the Canadian model. The question is, would our value system allow
us to do that? I doubt it
The other thing to remember is that the Canadians are a remarkably homogeneous
population. And they have a different value system. They tax themselves. Sixty-seven
percent (67%) of their income is taxed because they have an egalitarian philosophy. They
believe every individual should have minimum basic benefit rights. And so, every
individual in Canada is promised housing that is adequate, even if it is low cost,
subsidized. And secondly, they are guaranteed a minimum amount of income. That
minimum amount is $12,000 a year. So, if you're poor and you live in poverty, and you
only make $9000, the government sends you $3000 to make up the difference. This is
a totally different philosophy than the U.S. has. We could go to the Canadian model, but
that means we have to dig deeper into our pockets and change our value system.
How do they pay their physicians? Keep in mind they have a single payer, the
government. They set a fee for particular services, and then they negotiate those with the
individual provinces. There isn't really much negotiation. And they have a cost-control
technique called "service volume control." They prohibit balance billing, meaning that
if a doctor is supposed to get a government rate, that's what he or she gets. Physicians
can't charge more than that. Service volume control means if doctors go over the amount
the government has allocated for them in anyone year, they will get ninety cents or
eighty cents on the dollar next year.
Does this sound a little familiar? Last year Medicare instituted something called
"resource based relative value scale." We put in a prohibition on balance billing except
for about five or ten percent more. And we put in service volume controls. Where did
we learn about that? Well, we looked to Canada and saw what our neighbors across the
border were doing, and decided that it might work here.
Queuing has been a big problem in Canada. The Canadians don't like that. But they
realize it's a trade-off. They realize they can get access to primary care services quite
quickly. And they also realize that there has to be a little queuing in order to be
Davis/January 1993 103
equitable. Until recently, as the queuing has gotten much worse, they have not really had
a major problem. But in the last couple of years, there has been significant waiting, for
example, orthopedic procedures for people who have to have a new hip. For hip
replacement, you have to wait a year and a half. That's a long time to wait if you're not
really well and if you're beginning to be less functional or perhaps even unable to work.
If we in the U.S. restrict our services and go to a system like this, the question would
be, are we willing to queue like they do? Remember that the Canadians are somewhat
like the British. The British people, when they passed their national health insurance after
World War II, were used to queuing. All during World War II, they stood in line and
waited for food, for fuel. So the fact that they had to stand in line and wait for health
care didn't seem like a major problem at all. Some of the ideas in Canada come from
that type philosophy, whereas, our philosophy of individualism and abundance and
wanting something right away means that we would have to significantly change our value
systems to adopt this model.
Let's take a look at another country: Germany. What have we learned from them?
Gennany's national health program started a long time ago. In 1883, Bismarck, who was
then ruling Germany, wanted to do something for the people. He decided to provide free
health care for them. But his treasury people said they couldn't do that. "We don't have
money." So Bismarck decreed that employers would have to pay for that. He decreed
that every employer must pay for the cost of insurance for their employees. Back in
1883, most of the people in Germany functioned in terms of guilds. The carpenters were
all in one guild, the brick layers were in another one. Thus was born what we call
"sickness funds." And today, there are 1200 different insurance companies or sickness
funds in Germany. Many of them, the majority of them, relate back to industry from
which they came. When workers go into a particular industry, they are affiliated with that
particular sickness fund. That sickness fund negotiates with individual hospitals for the
care of their people. Employees give up their freedom of choice to be insured under the
The sickness funds have a very comprehensive mandatory universal coverage. They
also have an occupational rating. And that's given rise to big premium disparities
between sickness funds. The:' are having a lot of problems recently over that. It's
created some unhappiness.
Germany also uses a global budget system, although they have multiple payers. They
set an annual global budget. All twelve hundred of these insurance companies come
together once a year, and they decide together what the rate of increase of spending will
I suppose the U.S. could do that. Except we have something called the Sherman
Antitrust Act. I think that the Justice Department would take a dim view of us having all
of our insurance companies get together and decide what the rate of increase will be. But
we could do that if we changed our value system.
So, what have we done instead? President-elect Clinton has talked about the
development of a national health board that would design a health benefits package and
set a global budget that would increase each year. In effect, he's borrowed some of the
ideas and changed them around slightly. In Germany, like Canada, they control the
capital budget. They negotiate. But remember that they spent 16 days on the average in
104 The Southern Business & Economic Journal
the hospital in Germany because they are paid on a per-diem basis. When you're paid
per day, you look less efficient. In Germany they are now studying the possible use of
a DRG (diagnosis related groups) system of payment because they would like to get the
number of days down. Now that they've amalgamated East and West Germany, they are
beginning to face some significant budget problems.
All the specialists are salaried physicians in Germany. All of these specialists work
for the hospital and are paid by the hospital. Negotiations are between the hospital and
the physicians. Primary-care physicians receive a different treatment. They are on a
capitated basis. or a fee-for-service basis. But they are outside of the hospital, per se.
The physician component uses a resource-based relative-value scale. It's no secret that
we got our idea for this from Germany.
When we look at the availability of medical technology, it is clear that the U.S. has
about three times what these other countries have in terms of organ transplants, the use
of lithotripsy and nuclear magnetic resonators. And yet their outcomes aren't that
different in terms of functional status, in terms of long life. No wonder that more and
more researchers are asking, "Is this procedure necessary?" As we look ahead, we can
see that we will probably have more and more practice guidelines.
While they have a very tightly run system in the United Kingdom, it is probably too
tight. They have a total federalized health-care system that we probably would not
emulate since we don't trust our government. And I would say that next to the monarchy.
that the people in the United Kingdom value their health-care system as being their most
treasured asset. In fact. with all the problems of the monarchy, they may put it fIrst.
Clearly, the one thing that we have learned from the United Kingdom is that they
have had enormous problems in queuing. What are they doing now to solve that
problem? They have taken individual district hospitals and are teaching them how to
competitively bid, when they can bid, for providing extra services to some other district.
Of course, they can get some additional funds and provide services to reduce queuing.
It was fun being over there trying to teach them how to do this. It took about two days
of nonstop talking before they finally caught on to the idea of competitive bidding. A
large number of private hospitals are now doing that.
To finalize, we have to look at what's going to happen here in the U.S. Civics
teaches us about laws. We know that there are 110 new members in the House of
Representatives. That's one quarter of the House that's changing; 12 members, or half
of the Ways and Means Committee, out of which comes most of the legislation that deals
with health care. Thus, we have a brand new scene this year. We have 49 women in the
House. We have 39 blacks and 17 minorities, meaning that together these minority
groups are made up of over 100 individuals. They may well influence change. It's too
soon to know yet.
So, as we look ahead to see what will happen. we have seen a number of health-care
system reforms, all the way from nationalizing the health-care insurance system, a la the
Canadian or United Kingdom model, through to mandating employer coverage or to
incremental reforms. The Clinton-Gore plan said, "To contain costs we must have
malpractice reform; we must have administrative simplification." These elements have
already been introduced under the Bush administration. President Bush introduced a
model practice act. But it has not gotten very far, yet. Partly, it has not gotten very far
Davis/January 1993 105
because a lot of Congressmen are lawyers. And I guess maybe they'd like to make sure
that if they weren't in Congress, they have some ability to practice. They might have a
tougher time practicing after getting through malpractice reform.
Clinton has also said that he would contain drug prices. And he would contain them
probably the way Senator Pryor has talked about. And that is to say to the drug industry,
"You cannot increase prices beyond the Consumer Price Index increase each year. And
if your prices grow beyond that, we will take away your tax deductions that you get, your
tax credits for new research ideas, and your tax credits for production in Puerto Rico.
Incidentally, that will probably pass Congress this year.
President-elect Clinton has indicated that he would strongly like to enhance primary
care and preventive-care services. If you look at the Arkansas model, they've clearly
done that. They've put a lot of emphasis on the development of primary-care nurse
practitioners, and nurse midwives to provide access to care for services that have not been
provided in the past and in particular in rural and inner city areas. And they have begun
to bring down the infant mortality rate.
Over time, Clinton has indicated he would like to move long-term care into the
Medicare program, probably starting with an expansion of home care. Finally, how would
he expand access? He has clearly said that he would favor a national health board that
would set minimum standards for coverage. He would then also set a global budget each
year, to grow at only the Consumer Price Index. We can see that would clearly impact
on the development of health networks and on small-group-insurance reform. We
probably could have had small-group-insurance reform this year had it not been an
election year. One of the frrst things we will see in health-care reform is the development
and the passage of some bipartisan elements. And the common bipartisan elements are
those such as tax changes to allow for credit for small employers and/or those who are
self-employed, as well as small-group-insurance reform, including mandatory community
rating of benefits, and probably the inability to preclude individuals from joining an
insurance company because of preexisting conditions. Those will be controversial to some
insurance companies, but that's what the American public has been concerned about.
Clinton can declare major reform in the health-care system if he can get these elements
passed: administrative changes, the practice guidelines, small-group-insurance reform, and
mandatory minimum-benefit health care at your place of work.
I believe that's what our reform package will look like in the early years. Over time,
perhaps, he may be able to get global budgeting passed. That's going to be much more
controversial. There have been some signs from the administration transition tearn that
they believe that some of these will be controversial and they'll take longer. But they do
anticipate significant proposals for health-care reform in the first hundred days, with some
passed into law this year and others phased in over the next several years.
Let me conclude by saying that by the year 2000 we will have universal access,
although we will have a pluralistic system. We will have fewer players who will be
receiving direct payment because they will be in networks such as community-care
networks. And we will have bundled payments with an adjusted national rate cap. Those
rate caps probably will not come until 1996 or 1997, and we will have a variety of
approaches to our care.
106 The Southern BWliness & Economic Journal
Finally, we will have a new and growing supplemental insurance market, because by
then we will have a minimum benefit mandatory coverage under the employer. And they
will only have tax credit for a minimum benefit package, which means that many citizens,
probably as many as 55%, will purchase private supplemental insurance with after-tax
dollars. And we can see that happening now in Germany, in the United Kingdom, and
even in Canada.
And that concludes our lessons this morning relating to health-care reform. There are
clearly lessons that we can learn as we study these other countries. The essential element
becomes: do we want to change our value systems so that we can endorse their way of
delivering health care?
Toby/January 1993 107
u.s. HEALTH CARE: THE ROLE OF
THE HEALTH CARE FINANCING
William Toby, Jr:
Over the next several months there is going to be a lot of attention paid to the
economy and the budget deficit, and there is going to be a sharp focus on health care.
These three are integrally related. Health care impacts on the deficit and the deficit on
the economy. In this regard I would like to do two things. One, I would like to talk
about the Health Care Financing Administration (HCFA). Then I would like to talk about
the big picture in terms of health care in the United States.
When I tell most citizens, as I travel around the country, that I am Administrator for
the Health Care Financing Administration, I usually get blank looks. It's amazing how
few people know about this incredible agency. It affects everybody in one way or
another. But it's a young agency; it was only founded in 1977. It may not be well
known, but HCFA is responsible for the health and safety of 62 million Americans.
That's about one in every four Americans in this country.
For fiscal 1992, the HCFA budget is estimated to be S204 billion. For fiscal year
1993, which just started October 1, the budget is estimated to be about $230 billion. This
budget is larger, perhaps, than any other industrialized nation's entire health-care budget.
To put it differenLly, HCFA has the twelfth largest budget in the entire world. And
this includes the industrialized world where most of the money is. If it were a single
agency, it would have a budget perhaps just below the Defense Department and just
smaller than the Social Security Administration. This is because Medicare and Medicaid
now take up about 13% of the federal budget. But in just eight years from now, looking
at HCFA projections for spending, Medicare and Medicaid will constitute 23% of the
entire federal budget. That means that HCFA will move ahead of both the Social Security
Administration and the Defense Department. That is why, in every newspaper in the
country, there is considerable emphasis and interest on the terms of Medicare and
In round numbers, HCFA pays for about 25% of this country's health-care bill. Some
people may think that because HCFA has such an incredibly large budget, that it's got to
be a big, big part of government employment. But, although we have a budget that's
going to reach over $230 billion in 1993, HCFA is one of the smallest agencies for its
budget in government. It has only 4000 employees. And the job gets done fairly well.
To show you how efficient the agency is, about 12 years ago it had 5000 employees. So,
we are down over 1000 employees over the last 12 years. The workload has doubled, and
'Acting Administrator, Health Care Financing Administration, Washington, DC.
108 The Southern Business & Economic Journal
we've lost 20% of our staff. The HCFA is, without any question, a major resource to any
administration, but not a determiner of the future of any administration.
If there is any health-care reform, be assured that the HCFA will be a major player.
We have the largest data system in the world, and some of the smartest people in the
world. HCFA, in its research and demonstration area, probably has more Ph.D.'s than
any other agency. These are respected Ph.D.'s in terms of being economisl'>, health-care
experts, people highly respected throughout the world.
I'm about to take a trip to Mexico within the next two weeks, and then on to Paris,
France to the Economic Cooperation Development Organization with Dr. Louis Sullivan.
And my staff has prepared the finest papers which talk about the beauty of the American
health-care system. In these international meetings, for the most part, the American
system, I am told, is scorned-and I plan to put the record straight.
Let me talk about where we stand today in terms of the U.S. health-care industry.
The U.S. health-care industry employs about 8.2 million people-I'm talking about 9.1 %
of the U.S. employment. In recent years, as the overall number of people who were
employed in this country has decreased, the number of people employed in the health-care
industry has actually been growing. In the last two years it grew by some 700,000. In
seeking opportunity, Horace Greeley once said, "Go west, young man." People now are
saying, "Go into health care." Health care is the fastest growing segment of our economy.
Employment in private health services increased almost twice as fast as total farm wage
and salary employment for 1975 to 1980, rising from 4.1 million to 7.8 million. And it
is projected to increase about twice as fast, reaching 11.5 million by year 2005.
There's scarcely a medical authority in the whole world who doesn't agree that the
United States has the best medical care available. We have great medical centers in New
York and Houston, Texas and other parts of the country. You and I know that whenever
the lives of any major world figure is threatened, they bring those individuals to this
country. This includes leaders of this world who even are antagonistic to the United
States. That's one of the reasons I'm glad to be going to Europe to talk about our health
Yet, we have 37 million people in this country who are without health
coverage-about one in every seven of us. We are not very pleased about that; I'm
personally am not happy about it. And we have great numbers of people who live in rural
and isolated areas who are separated by distance and geography from medical care
because their communities have great difficulty attracting doctors. In Wisconsin two
weeks ago, I was beat up a lillie bit by the physicians who felt that we were not, as a
federal agency, doing enough to allract primary-care doctors.
When I told them what we were doing, what we have on the plate to help primary
care in this country, they were terribly impressed. For example, Dr. Louis Sullivan, who
is from the South-from Blakely, Georgia-has never forgollen his rOOl'>. He has
agonized over the issue of how to use the incredible leverage of Medicare to attract more
primary-care doctors. We give billions of dollars to medical schools every year. What
do we get back? Nothing but a growing group of specialists, which gets larger and larger.
And so we have decided to use the clout of Medicare, that is, the billions of dollars
we put into health-care centers and medical schools, to get them to change their policy.
Toby/January 1993 109
We want to give greater reimbursement to medical schools that attract doctors into
primary care. We want to use new settings for the training of physicians outside of
medical institutions. HCFA is doing that, and we're very proud of it.
We also are very much aware that in the large urban areas like New York City there
are people who live in slums, who live very close to incredible towering medical centers
but from which they cannot get services. This is an anomaly in our health-care system
of which we're not very proud. We are also conscious of the fact that we're spending
more per capita on health care for citizens than any other country. And even though we
spend more money per capita on health care than any other country, we have not been
able to discern any difference between the health of our population and the populations
of the industrialized countries that are spending less money than we spend.
Projected national health expenditures in 1992 totaled well over $800 billion, about
32% of gross national product. Even in short-range projections, this threatens the
economic security of this country. What do these projections show? From the HCFA
data center, these projections basically show what the trends are in rising health-care
expenditures. The data show that if current trends continue, health-care expenditures in
the U.S. are going to reach about $1.7 trillion by the year 2000, just eight years from
now. This is an amount equal to about 18.1 % of the gross domestic product.
The Medicare Trust Fund, Part "A", is expected to be exhausted in the year 2002
unless the current Medicare payroll tax is doubled or the level of benefits halved.
However, the Medicare Trust Fund, Part "B", from which Medicare pays for
physician services and outpatient services, and which receives its dollars from the general
revenue funds (your tax dollars) and from premiums that enrollees pay, will remain
solvent. But by the year 2000, it is projected to need about $125 billion a year. And
enrollee premiums have to rise to almost $700 per person, up from $380 in 1992.
State Medicaid expenditures in 1990 were a third higher. They went up about 26%,
much higher than they were in 1988. In 1992 alone, Medicaid expenditures rose 35%,
and they are projected to grow at about 30% over the next couple of years. States and
the federal government share the Medicaid burden. Both the federal government and the
states have been caught in a double bind; that is, the recession that reduced the laX base,
and, at the same time, an increase in the number of people eligible for Medicaid services.
Both the federal government and the states have the liability to finance these services.
By year 2030, when the American baby boomers enter their seventies and eighties, health
expenditures will probably top $16 trillion, or 32% of the gross domestic product.
A word of caution: these projections are going to exist only if our programs remain
unchanged. This is unlikely, since we've heard a lot about change that is pending. But
if the government doesn't change the existing legislation, all of the projections will come
true. Congress indirectly controls the entitlement programs, including Medicare and
Medicaid. They determine who is eligible. They also determine the payment rules that
will apply. So it is up to Congress to do something.
Before despairing about rising health-care expenditures, you should know that minor
changes do oceur from time to time. In fact, they are occurring continually in terms of
our trying to get some control over the system. Once in a while we have a major
historical change, such as the prospective payment system which Dr. Carolyne Davis put
110 The Southern Business & Economic Journal
imo place. And we did get physician payment reform through my predecessor, Dr. Gail
Wolenski. But that's not going to save any money. That merely rearranges money by
redistributing money from specialties to primary-care physicians.
But the prospective payment system has enabled the Medicare Trust Fund to stay
alive to this day without costing you a lot of money because we have been able to control
the rising expenditures. We have been able to change the way in which hospitals and
other providers historically do business. That has been the one significant change that has
allowed the program to survive. But rarely in history does that occur.
Control of fraud, abuse, and waste receives an incredible amount of attention at
HCFA. Recently, Inspector General Richard Cusaro left the department. His
achievements were many in terms of getting on top of fraud, abuse, and waste. We have
saved millions of dollars through fraud and abuse conlro],
HCFA is moving very aggressively to install a completely electronic environment in
the field of health care. On October 19, Dr. Louis Sullivan, our secretary, announced
our eleclronic strategy. We want to install a system that computerizes patient records and
standardizes claims processing. If this is done right, HCFA can save about Sl 14 billion
over the next eight years. Once the system is computerized, we expect to save about $35
To again give a sense of our size, HCFA processes 650 million Medicare claims per
year. That's going to rise to about a billion claims a year within the next eight years.
By using an electronic system and completely computerizing all of our Part "A" bills and
having them electronically transmitted, we're going to save a lot of money. Already, in
terms of our Part "A" electronic transmittals, we're up to about 85%; and on the Part "B"
side, we're at about 57%. We expect to be at 100% within the next few years. There
will be no paper being transmitted under Medicare. That will completely revolutionize
But remember that in the big picture, HCFA is just one of 1500 public and private
insurance companies. Thus, HCFA is somewhat limited in terms of what it can do to
change the way in which America finances its health-care system. HCFA represents only
about 25% of the health-care system.
The HCFA recognizes that 57% of the people in this country get their health care
financed through private health insurance, the nature of which is mainly an employer
based system; and that's the way it should be. So, in the long run, it is going to be very
important that HCFA works very closely with the private sector. Without private-sector
cooperation, we will not be able to comrol costs, promote health-care reform and
generally get the job done.
Regarding the HCFA strategy, we recognize that we can't control the health-care
system. We cannot control health-care innation. We understand the nature of the
American health-care system that basically is one in which third panics pay the bills. A
lot of insulation takes place.
The health-care marketplace in this country works like none other. We don't have
the right incentives. We can't control technology. In this country, whenever there is new
technology introduced into the health-care marketplace, instead of working like the rest
Toby/January 1993 HI
of the American economy where costs go down, the cosL, always go up. That's been the
experience in Medicare. We have nothing against technology. We think it's good. But
we want to reward technology that has some kind of cost efficiency built into it. We are
of the mind that the federal government cannot control the health-care system and the way
the marketplace operates. The incentives are just too much in the opposite direction.
What then has HCFA decided to do? HCFA has decided, a conscious decision made
before I arrived in Washington, that we arc going to run away from fee-for-service as fast
as possible. We can't control it, so we're going to get away from it. And regardless of
who comes in with the next administration, it seems that both political parties are
absolutely committed to moving away from fee-for~serviee. The theoretical base for this
move is best explained by a professor and economist at New York University, Dr.
William Baumol, whose claim to fame is his knowledge of the theory of pricing and
productivity. What he has said is that in areas of endeavor where productivity is not a
factor, prices tend to rise at twice the rate of inflation. He sees this phenomenon as not
peculiar to this country but to the world at large.
The medical-care area is the place where traditional marketplace incentives, or
marketplace factors, just don't operate. The reason they don't is because in the American
health-care system, we have gatekeepers of 500,000 physicians and 6000 hospitals. They
are the ones where there is a delegation or decentralization of decision making. And the
federal government cannot control that. So, we have decided that we are going to take
our Medicare and Medicaid programs with their 62 million beneficiaries and move into
managed care. Both political parties agreed on this one point. That is a decision that you
will find President-elect Clinton talked about in terms of managed competition. It is a
decision that is the result of 27 years of experience.
Had I been around in 1965 when we established Medicare and Medicaid, neither
program would look the way it looks today. They would have come out with a different
structure, a different payment system. Dr. Carolyne Davis did her best with the DRG
system. It was the first time we put into place a system where we determined what we
were going to pay. And anyone who wanted to raise the price did so at their own risk.
Hospitals did not go bankrupt. The American health-care system has not suffered from
it. While there arc studies showing the DRG system has had adverse effects, other studies
show it has had positive effects. The American health system is as solid as ever. But
it's the first time we injected the right kind of economic incentives into the system. We
want to do that with managed care. That is where we are moving very aggressively
because of the market's failure to control costs. Under Medicare, there are now about 2.7
million beneficiaries under managed care; and in Medicaid, there are 3.6 million. Some
states are far ahead of the federal government in this area. New York and California,
with their huge Medicaid bills, have decided to move very aggressively toward managed
care. Over the next five years, both New York and California have insisted, as a maller
of policy, that 50% of their Medicaid recipients be in managed care. HCFA just made
grants out to a number of states, $10 million, to encourage them to work with our
Medicare beneficiaries to educate them about the advantages of managed care.
What will the end product look like? When Congress recessed a few weeks ago,
there were over 100 bills in Congress aimed at these problems we're having in the health
care system. The American public believes without question that there should be change
in the health-care system. Both government and the private sector believe there should
be change. Each recognizes that no one has the complete answer. But everybody is
112 The Southern Business & Economic .Journal
willing to try to change the system. The challenge is going to be moving beyond what
is agreed upon. The problems are very different for many. As we move forward, what
we have to look out for are what the historians call the law of unintended consequences.
I'm hopeful that those who will be in charge of taking us forward will be very mindful
of the fact that we don't want a solution that's worse than what ails us at this point.
Everyone should be very active in giving opinions about what ought to be done to fix
the problems in the American health-care system. Because HCFA plays such a major role
in terms of policy development and implementation, I have made sure that my policy
people have very open minds. We have opened up the HCFA to the public, to get its
ideas and thoughts about what ought to be done. Don't think that anybody in Washington
has a better idea than the average citizen. At HCFA, I have tried to bring a perspective
to have an open mind and not think that we have the best ideas. Consequently, over the
last seven months, some incredible ideas have come in.
As you probably know, the HCFA releases hospital mortality statistics each year.
People don't like that sort of thing in some instances. Consumers like it, of course. But
what I tried to do was bring in hospital leadership, and get them behind us. We have
found a way, next year, to release the same kind of information to the public about
hospital mortality, but doing it with the leadership of the American Hospital Association,
which had good ideas that we all agreed were good ideas.
I have worked very closely with Jim Todd of the American Medical Association.
When we came out with new clinical lab organizations, we were supposed to go into
doctors' offices unannounced. We didn't do that. Why didn't we do it? Because we felt
Jim Todd and the AMA made good recommendations about how we should do it. I
brought them in to tell me how we should implement the most difficult law, that is, the
Clinical Laboratory Act of 1988. Because of that, we were able to make changes.
We had physicians who came from Wisconsin to tell about the difficulty of
laboratories operating in rural areas, of not having people with the right education or
background, but who had been doing it for many years. The fact was that they couldn't
meet our requirements overnight. I made sure that we waived those requirements when
In closing, a principal point to remember is that citizens have to be active; they have
to be involved. That's been my experience. And it is required to produce a better health
care system for the U.S.
Bowden/.!anuary 1993 113
HEALTH CARE VALUE:
A PURCHASER'S PERSPECTIVE
Travis J. Bowden·
To the business executive trying to sustain a competitive enterprise, the continuing
escalation of the cost of health care is a major business issue. Politicians are going to
address the problem during the next administration and over the course of the next few
years. Likewise, business people and community leaders must step up their efforts to
Health care must be analyzed in terms of availability, quality, and, what is of most
concern to corporate management, the escalating costs of paying the bill. Until recent
years, health care was a minor cost to business. But, with most companies experiencing
a doubling of the cost of health care every five years, it has become a business issue that
must be addressed.
In addition to the rising cost of purcha"ing health care, several other factors have
contributed to health care becoming a major business issue. Coupled with increased
competition, the need to reduce business costs due to the recession has raised awareness
of the impact health care has on the company's bottom line. In addition, the recent
Financial Accounting Standards Board rule, FAS 106, has focused corporate attention on
the projected costs of retiree health benefits. The cost of providing these retiree health
benefits has reached levels never anticipated at the time these benefits were promised.
This represents a large liability for many companies and they will have to meet it. Many
companies are now looking at capping retiree health-care benefits because of the new rule.
In completing or budgeting process at Alabama Power Company a few years ago, we
projected some of our costs over a five- to ten-year period. Our objective was to hold
down expenses in order to keep our customers' utility rates stable. Based on recent trends
and on what the experts were saying, we projected that health-care costs would increase
at 12% per annum.
After this assessment, we knew we needed aggressive cost containment in many areas,
including health care. We raised deductibles, restricted some coverages, implemented
managed-care strategies, and asked employees to pick up a share of the escalation. These
and other changes slowed the increases, but they are still growing and still a concern for
We also continue to educate our employees in the wise use of medical care, and we
have implemented a wellness program that we expect to provide a payback in coming
years. We are promoting healthy lifestyles and preventive measures.
·Executive Vice President, Alabama Power Company.
114 The Southern Business & Economic .Journal
But, all of these things are internal to Alabama Power. They are having, and will
have, good results because we are paying attention to them. Alabama Power Company
doesn't want to stop there. We want our 8000 employees and their family members to
have high-quality health care availab\c when they really need it. We want that health care
at an affordable price for them as well as the Company. We want the same for every
citizen of the state of Alabama.
The Company operates throughout the state of Alabama. In many rural areas our
employees have difficulty getting access to medical care. We need better access and we
need it to be affordable. To achieve this, we've got to look beyond Alabama Power
Company and look at the health-care delivery system.
Our company is a member of the Alabama Healthcare Council (AHC) which was
formed by a coalition of health-care purchasers in 1985. The effort to influence change
in the health-care delivery system did not accomplish much at first. A few years ago,
however, the board hired a former hospital administrator to become the new executive
director. Forty-two companies in the state are now members. Many of the members are
Birmingham companies, but the Council is branching out and getting members from
throughout the state. Member companies have over 100,000 employees. Over 250,000
family members are provided health-care coverage by these companies.
The AHC is seeking to work with health-care providers, community leaders, labor
leaders, and others to influence viable solutions in the purchase and delivery of health
A little over a year ago, in the Birmingham area, the Alabama Healthcare Council
began an initiative called the Value Improvement Partnership (VIP). It is an initiative that
should influence needed reform in the local health-care delivery system. The VIP will
reward quality health care, efficiency, and continuous improvement in a free marketplace.
The VIP concept allows employers to retain control of their medical plans so that they can
be flexible in customizing the design to meet the needs of employees, control
expenditures, and respond to opportunities and changes in the health-care marketplace.
The vision of the VIP is "access to quality and appropriate health care for all
Alabamians, with patient outcomes and price stability that are a source of pride and
economic appeal." To help in achieving this vision, the VIP has its own Board of
Directors comprised of acknowledged leaders from the business and medical communities.
Most of the large companies in Alabama are represented on this Board: Alabama Power
Company, BellSouth, Drummond Company, Energen, Sherman Industries, SouthTrust
Bank, and Stockham Valves. Also represented on the board are the Baptist Medical
Centers, the University of Alabama Medical Center, and two prominent area physicians.
This is a "blue ribbon board" which directs the partnership and emphasizes the importance
of this initiative.
There arc various task forces and committees currently at work to make the VIP
vision become reality. These committees are staffed by physicians and professionals from
hospitals and the business community. They are teaming up to work on the details of
some of the ten VIP strategies that aim at improving the quality, cost, and access to health
care in Alabama.
Bowden/.January 1993 115
One lask force has already selected a uniform risk-adjusted, clinically-based quality
measurement system to be used in a demonstration project at volunteering local hospitals
in the Birmingham area.
The initial target areas for benchmarking and continuous quality improvements are
pneumonia, heart attacks, and all deliveries with a focus on c-sections. These are the
three highest cost areas of the VIP member purchasers.
We will use a uniform system to track and report dala to make cost and quality
comparisons between participating hospitals. The partnership will then be able to initiate
actions that influence efficiencies and continuous quality improvement. This should
produce savings and solutions that are long term for the entire community, not just for
Alabama Power and other members of the Healthcare Council.
Similar initiatives are taking place around the country in places like Cleveland,
Orlando and Memphis. Their results show promise and verify that we can seize the
opportunity here in Alabama.
The VIP is a partnership among community stakeholders. When people involved
come from all aspects of the problem-payers, physicians, and hospital administrators
the likelihood of success is much greater. The Healthcare Council believes that the
partnership gives us the opportunity to address some duplication and eliminate some
practices that will streamline and improve our local medical-care delivery system. The
degree of interest is strong, as demonstrated by the 42 companies that are members.
There is no doubt that we are going to have health-care reform. Reform, when it
comes, must work in conjunction with local initiatives. As we influence national reform
and await its outcome, we should be aggressive in identifying and implementing solutions
in our local health-care delivery systems. Each community has unique market influences
and different stakeholders. In addition to national reform, the best solutions to the
problems of access, quality, and cost must be debated and resolved locally.
Another related factor worth mentioning is economic development. Alabama Power
is heavily involved in economic development. Most communities are interested in new
development and new plants to improve and sustain their local economy. Health care is
going to become an increasingly important factor in the location of new developments and
new plants. It will take its place alongside education as a major criterion for business
development. Presently, education is the major criterion with respect to development in
Alabama, particularly because of our deficiencies in this area. But companies and
investors are looking at health care as an issue that they must consider as they decide
whether to locate in our communities.
This forum today demonstrates the imporlance and allention that health care is
demanding as a business issue. We cannot wait for Congress or our slate legislature to
act. Through partnerships such as the VIP, we can participate in solutions in our
respective communities. If you are interested in more information about forming your
own community partnership, call the Alabama Healthcare Council in Birmingham. The
director, David Johnson, will be pleased to assist you in gelling started.
Recently, Dr. George Lundberg, in an article published in the Journal of the American
Medical Association, predicted that there will be a health-care system meltdown by 1996
116 The Southern Business & Economic Journal
if something is not done with respect to the cost of health care. Whether or not this is
true, we certainly cannot continue to have a redoubling of costs every five years.
Something must be done and we must seize the opportunity now,
Cheeley/January 1993 117
HEALTH CARE IN CORPORATE AMERICA:
THE COCA-COLA COMPANY'S
NEW APPROACH TO TODAY'S
C. Ron Cheeley·
Most of the speakers today have talked about the cost of employee benefits. How are
we going to reduce health-care costs? How are we going to cut the cost of benefits for
our employees? Coming from a finance background and looking at what's happening in
The Coca-Cola Company, cost is very important. But there is another item that's much
more important, perhaps, than cost-and that's employee relations. As companies deal
with labor and employee relations, health care is a very sensitive issue. A company can
make a reduction, perhaps, in a pension plan, and may not get too much negative reaction.
But start making changes to the health plan, and you know what happens...a very key
1'd like to talk about health care in corporate America. And, more specifically, about
The Coca-Cola Company's new approach to today's health-care needs: a major initiative
that we have just introduced to our employees which will become effective January 1,
1993. But first, I'd like to take you on a journey of how The Coca-Cola Company got
involved in the health-care business. Corporate employers are in the health-care business
no matter what their primary business may be.
In 1938 the Board of Directors of The Coca-Cola Company approved its first health
care plan. One might wonder that, fifty years ago, if the directors knew what we know
today, would they have approved the plan? The schedule of benefits for employees was
driven by the annual earnings of the employee. An employee that was making less than
$1951 a year got a daily hospital benefit of four dollars per day. A special fees maximum
reimbursement was $20 and the benefit maximum reimbursement was $100. The cost to
the employee was forty cents per week for the coverage. Benefits for our highly
compensated individuals were higher. I'm not sure this plan would pass the
discrimination requirements of today. But there were no ERISA or IRC rules, so a
company could basically do what it wanted to do.
Moving through the years, the scenario of what The Coca-Cola Company did
probably tracks very closely to many larger corporations. Once a plan was put into place,
the Company began adding coverage. InitiaIly, there was no coverage for dependents, but
in 1949, management felt it was important not only to cover the worker but each
dependent as well. In 1957 the Company introduced major medical coverage with a
$10,000 maximum. In 1965, the maximum was increased to $20,000; and in 1972, to
"Director of Corporate Employee Benefits, The Coca-Cola Company, Atlanta,
118 The Southern Ilusincss & Economic Journal
$50,000 and the deductible was lowered. The latter is almost unheard of now. Have any
companies lowered their deductible recently?
The maximum has continued to move upward, an indication of what has happened
in the health-care arena, as costs continued to rise. In January 1980, a self-funding
approach to benefits was adopted in an attempt to be more cost effective-an attempt to
manage health-care dollars more efficiently.
In July 1982, the Company moved the maximum to $500,000; and in January 1985,
it implemented direct claims filing as opposed to processing claims in-house.
In January of 1986, we introduced Pm-Pass. This is the hospital precenification and
concurrent review program of Prudential. In July 1987, the major medical maximum was
increased to $1,000,000. In January 1990, we introduced a flexible benefits program
called Select; and in January 1991, we introduced Vision Care. So, The Coca-Cola
Company has continued to build its health-care plan from a very modest benefit to a very,
very rich benefit program for employees. The Company has now initiated a new program
which goes into effect on January 1, 1993, called Select Care.
Reflecting on what has happened at The Coca-Cola Company, costs have had an
impact on us, but our employee-relations emphasis also has been very important. In 1965,
the employees paid nine dollars per month for family coverage; and, in 1993, they are still
paying nine dollars per month. In 1965, the employee was paying about 60% of the cost.
But over the years, as the Company's costs have increased, we have been fortunate to be
able to maintain the same employee contribution. Today, family coverage represents less
than two percent of the total contribution.
Looking at cost trends, Mr. Bowden mentioned the annual 12% increase for Alabama
Power Company. That tracks very closely to The Coca-Cola Company's trend. In a
comparison of The Coca-Cola Company with a study by the Research Council on
Employee Benefits of The Conference Board, our COSL<; rose slightly more than the
annualized trend of 26 large Fortune Fifty companies. The rise of these 26 companies
was 10.3% versus our 11.5%. While our company trend is not out of the mainstream, our
benefit levels are generally very rich and considerably higher than most companies'.
This brings us to the issue of what to do. Obviously, costs are continuing to rise.
My charge was to figure a way to use our health-care dollars more efficiently and to
deliver health care more efficiently. The solution, beginning January I, 1993, is Select
Care. What is Select Care? Select Care basically is The Coca-Cola Company's approach
to managed care; a new approach to today's health-care needs, although perhaps not
totaIly new. This plan is a point-of-service plan. But, looking at the benefit levels that
are provided, it's a little bil unique in one area; that is, our plan continues to allow choice.
Choice is very important to The Coca-Cola Company.
What is managed care? If you ask that question in the consultant community or even
the benefits community, you're probably going to get ten different answers. But our
defmition of managed care is basicaIly an organized system of health-care delivery thal
emphasizes physician and hospital networks, and a network manager. It emphasizes
financial accountability for all parties, quality medical management, and discounted
Cheeley/January 1993 119
AL the heart of the SelecL Care program is the use of a primary-care physician.
Primary care is pretty much where the rubber meets the road in health-care delivery. The
job of primary- care physicians is Lo provide basic medical care, including prevenLive care,
and LO arrange referrals when necessary. SelecL Care emphasizes neLworks. BUL mosL
importanLly, iL emphasizes the abiliLy for employees Lo go in or ouL of the network as they
The Coca-Cola Company operates in all fifty states and internationally, as well. It
has sixLeen neLworks in place across the counLry thaL will be in effecL on January I, 1993.
We did a tremendous amount of research over the lasL Lwo years: evaluaLing neLworks,
making sure LhaL nOL only qualiLy medical managemenL could be delivered in the neLworks,
bUL also that access was available to our employees. There are ciLies where we don 'L have
neLworks seL up now. Those employees will conLinue LO be outside of the SelecL Care
sysLem in basically the same indemniLy plan as before.
The Coca-Cola Company has abouL lO,OOO employees and 3000 reLirees in the U.S.,
excluding bottling operations in the U.S., and about 21,000 employees inLernaLionally.
Four Lhousand employees are in ALlanta, which is our headquarLers and has our largest
employee population, and obviously a very key neLwork for us.
Let's discuss the whole issue of the primary-care physician and the importance of that
physician. In our current fee-for-service approach LO medicine, all medical services are
being provided with no coordination whaLsoever.
The primary-care physician, we believe, is the spoke that makes the wheel Lurn and
is responsible for providing coordinaLion of care. We believe LhaL if this primary-care
physician does his or her job, thaL we will receive beLLer quality care; we will receive
appropriate utilizaLion. Under uLilization is noL good, bUL over uLilizaLion is just as bad.
We hope Lhis sysLem will work. AL this poinL iL represenLs whaL we believe Lo be the mosL
appropriate solution for today's healLh-care needs.
Another thing we Lhink that SeleeL Care docs is create a partnership. FirsL of all, with
self-insurance, The Coca-Cola Company pays the bills. We have had somewhat of a
difficult Lime convincing our employees. They sLill Lhink it's PrudenLial-Lhey want LO
make sure Lhey geL premium dollars back. But we're doing some educaLion in thaL area,
and, hopefully, we are beginning to form a partnership with employees and have them
recognize thaL they are part of the process as well.
Our providers are very important Lo us. We are beginning to get much more involved
in the medical community, meeLing wiLh the various hospital CEOs in ALianta, as well as
other major networks, Lo talk abouL Lhis whole issue of healLh care. The response has
. been overwhelming. This has noL happened in the past. Health care is the only
commodity or service thaL corporaLe America is buying thaL they don'L know who they
are buying from. They have been buying from whaL they Lhink is an insurance company
bUL never have meL, in many cases, the individuals delivering the service. Companies
have been blaming the hospitals and physicians for the problem. They, in Lurn, have been
blaming the insurance companies. BUL if wc take Lhis new approach, we can work
LogeLher to solve the problem or aL leasL make headway.
Why managed care for The Coca-Cola Company? Although cosL is noL our LOp
concern, iL is very importanL to us. BUL there are oLher reasons for implemenLing a
120 The Southern Business & Economic Journal
program of this nature. First, to manage the flow of health-care delivery. Sccondly, to
encourage involvement by all parties and to provide enhanced benefits for in-network
usage. If employees do not choose Select Care but continue to go out of network, they
will get essentially the same level of benefits they had before.
Many companies have basically made it so punitive that employees have no choice
but to select the network. They talk about choice and point of service. But if you look
at some of the benefit schedules, you will find $500 deductibles, 40% co-payments. I
don't believe that employees on the lower end of the wage scale with large families can
afford to go out of network with these type plans.
We believe that Select Care provides the means to purchase appropriate health care
below retail. We're projecting savings for our company between $12 and S15 million
over the next three years. Select Care will allow us to reduce premium rates by about
seven percent in 1993 for the network areas. We are not sure, at this time, but we fee)
that we are moving in the right direction on the cost side.
With the current plan design, it will become very clear that our program still allows
choice. As indicated earlier, the flexible-benefits program that began in 1990 provided
choice among health plans. With managed care, or "managed flex" as many of the
consultants will call it, we have two managed plans. The first plan is Select Care I.
Basically, if an individual goes in network, that person has a $10 co-payment each time
they go to the doctor. There is no deductible; for hospitalization, no deductible, no co
pays; prescriptions are $2 co-pay for generic and $5 for brand name; for emergency room,
a $25 co-payment. For those that elect to remain out of network, $100 deductible and
20% coinsurance with a $700 maximum out of pocket.
The Coca-Cola Company also has a second plan, Select Care II. The only difference
in that plan regarding in-network versus out-of-network is S10 co-payment versus $15.
But going out of network is more punitive, with a $200 deductible, 30% coinsurance, and
$2500 annual maximum out of pocket. This plan is designed for employees who find that
all of their physicians are in the network. They don't pay a premium. This is designed
to reward those people who are going to get 100% of care in-network.
The Company also ha<; a supplemental plan just for catastrophic coverage. This plan
is designed for individuals who have a spouse who has coverage elsewhere and, perhaps,
don't need coverage and would like to get more money back. Also available are HMOs.
We do have some lock-in (no outside choice) HMOs around the country that are offered
As for cost, Select Care I is free for single employees, $7.50 per month for employee
plus-one, and $9 for family coverage.
Under Select Care II, however, with employee-only coverage the employee geL<; $144
back; for employee-plus-one, $216; family coverage, $288. They can take this in cash
or use it to buy other benefits. Thus, as an example, they could select Select Care II and
use the money to buy more life insurance. The supplemental plan provides even greater
HMOs are priced identically to Select Care I. Again, these arc the lock-in services
where there is no choice for out-of-network services.
CheeleylJanuary 1993 121
Select Care provides a coordinated system of enhanced benefits, including preventive
care. If an individual goes in-network, they are provided periodic exams, well-baby care
and immunizations previously not covered in the program. A goal of the program is
keeping people healthy.
There were some risks. We had to make sure that management was aware of the
risks and potential disadvantages to moving to this type of program. How would
employees perceive this? Could we get them through that period of time where they were
asking, "What's the down side?" How could we communicate this program in such a way
that they would fully understand it and understand that it was not a cut in benefits but
rather an enhancement to a good program?
Quality is sometimes difficult to measure. Network managers and consultants have
been trying to measure quality. We don't think they have come up with a true definition
of what quality is, but we hope to be able to begin those processes. We hope to be able
to tell and demonstrate that quality health care has improved.
Another issue is network customization-the recruiting of physicians and hospitals
not currently participating. We have had some very good successes in cities that
traditionally had not been managed-care cities; Atlanta being one. Response has been
very positive from the community. We still have a few physicians that are holding out,
but over time, this is where we're headed. The Coca-Cola Company thinks this is a
solution-not the total solution, but at least a temporary solution-to solve health-care
problems. If not the solution, it's at least on the right track.
122 The Southern Business & Economic Journal
PUT THE PATIENT IN THE DRIVER'S SEAT
Daniel H. Johnson, Jr:
This country has a health-care system with a lot of advantages. But it's a system
that's in disarray. The physicians in this country will tell you that the status quo is simply
not acceptable. We can't go on with the situation that we have now.
We appreciate the opportunity to work with Mr. William Toby, Jr. and his
predecessors in the Health Care Finance Administration. But I have to respond to the
notion of taking everyone out of fee-for-service in the delivery of health care to people
for whom the federal government has responsibility. I strongly disagree with the idea that
it is somehow inappropriate, immoral, or not correct to have fee-for-service medicine,
especially when the reason that it is not correct, allegedly, is because someone being
rewarded on a per-service basis has a built-in incentive to deliver more services to gain
more financial reward.
As individuals, suppose that you were sick, and you only had two choices of
physicians. The only two physicians available to you were both intellectually-dishonest,
competent in terms of the quality of care provided, but in terms of their morals, in terms
of their interest in you, charlatans. Which one would you prefer for your care: the
person who earns his living by giving you the care you need and then a little extra, or the
person who gains his reward by withholding some of the care that you need? We need
to get that argument back on a positive footing. The physician is obligated to deliver the
appropriate eare regardless of the financing mechanism. This is where we're coming
from. The American Medical Association believes the biggest opportunity for solving the
health-care problems comes from expanding the choices, not limiting the choices.
Let's talk about what we're up against. First, the system we have now clearly has
to be changed. Nobody can be satisfied with the large number of people who are
uninsured; no one can be comfortable with the escalating expenditures. Most physicians
are small businesspersons. In my active practice of diagnostic radiology, my employee
insurance premiums went up 31% on January 1, 1992. I can't continue to pay such
We have a dilemma with the way Medicare and Medicaid are constructed and
operated. Medicare has very low administrative expense because it's off-loaded onto
hospitals and doctors. And harassment is substantial. Mr. Toby has indicated how we
are able to sit down and reconcile these situations. And the dilemma doesn't come so
much from the HCFA as it does from Congress, which keeps imposing new kinds of
regulatory burdens on us. At the same time, both the Medicare and Medicaid program,
even with as much money as they spend, under-fund the payments they make for services
"Doctor of Medicine and Speaker of the House of Delegates, American Medical ,
Johnson/January 1993 123
to both hospitals and physicians, so thal the cost shift is a major problem for the private
sector. I don't think anyone denies that.
With respect to Medicaid, almost 60% of the people in this country who arc below
the poverty line earn too much money to qualify for the program that was put in place to
fund their care. Yet it's spending money at a rate that is bankrupting states as well as the
federal government. Something's wrong there. We have to examine that. But not by
getting into fights with each other. We need to examine it by sitting down and trying to
figure out how to make it better.
We have developed this mind-sel in the private seClor that the best way to make
insurance work is to avoid risks. And that's now what health insurance is all about.
Then we have the dilemma that all physicians are concerned about: how third parties get
in between the physician and the patient in terms of making decisions.
Once you decide that change is desirable, then how can we change? We can change
for better or change for worse. We clearly want to do something to make the system that
we have better. But as much as we need to have change, we still have a lot of intrinsic
strengths in our system. We don't want to throw those oUl while we're seeking to solve
the dilemmas that we have.
Before proceeding, let's look at what some of the medical jargon means. Managed
care means different things to different people. Managed care runs the spectrum from that
expressed by Mr. Ron Cheeley of The Coca-Cola Company, to a more confined example,
which would be like an HMO. Managed care is certainly something we all need to
understand and better define. The American Medical Association works very hard on
trying to say what we think it takes to make a managed care system work and what's fair
Balanced billing is that concept in a fec-for-service system where, if the third party
makes a payment and it's below what the charge for the service is, the physician would
have the right to bill for the difference. By contrast, mandatory assignment is that
circumstance in which the person providing the service is required to take what the
insurance will pay. That begs the distinction between the terms "payment" and "fee".
There's a big difference between those two. A fee is what a physician ought to be able
to charge for his or her services, depending on how much it costs to deliver that service.
The payment is what the third party contributes toward that service.
With respect to health insurance, we seem to have lost sight of what health insurance
is all about. We're seeking to avoid risk instead of spreading risk. This leads to all kinds
of misconceptions about health insurance. Here's an example taken from a column in
July of 1991 in The New York Times. A study was done of the people insured by Blue
Cross-Blue Shield in the Cleveland area during the year 1989. About ten percent of the
population received over 13 times as much benefit-per-person as the other 90%. Looking
at that in terms of absolute dollars, almost twice as much money was paid to the ten
percenl as was paid to the other 90%. When you dissect that top receiving ten percent,
one percent, or ten percent of the ten percent, got 36.5% of the amount paid to that group,
and almosl a fourth of the money for the entire insured population. This article was
124 The Southern Business & Economic Journal
• Can anyone be satisfied
• with 34 million Americans uninsured?
• with the rate of increasing health-care
• with the complexity of filing insurance forms?
• with the way the government runs Medicare
• with the way the health insurance system
avoids rather than spreads risk?
• with the way insurers and government
interfere with the decisions of patients and
• Proper role for government
• not a state-centered, bUdget-driven,
• provide for a fair market system, ensuring
health coverage for all Americans, and
assisting those who are unable to provide for
themselves and their families
• Change is needed
• but, such change should build on the
strengths of our uniquely American system of
written by Tom Wicker, who concluded if we could just figure out some way to get rid
of those ten percent, we could make the whole system work. I suggest that this mentality
is what's wrong with our approach to insurance.
Think about it in terms of home insurance. If you could cut out the people whose
houses burn down, the fire insurance for everybody else would be vastly cheaper. It's a
wonderful idea. What we're focusing on now is avoiding risk. But the idea should be
to spread risk, not avoid risk. That's what health insurance, just like any other insurance,
ought to do.
Now, let's focus on cost. Cost, access, and quality are the three issues. But the one
that's driving the other two is cost. I have some difficulty with the term "cost
containment" and prefer the term "cost effectiveness". By cost effectiveness, I'm talking
about value; getting more bang for the buck; trying to figure out what works best in every
situation. Cost containment is so strident that it may have an undesired effect. Think
Johnson/January 1993 125
about all of this from your own individual personal perspectives as patients. I'm not
going to go into all of the reasons that the costs are going up. But I'm going to focus on
the top two.
First of all, technology does drive the cost in this country, but it's not all bad. And
sometimes, it's cost effective to have new technology. As an example, suppose you were
suspected of having a benign intracranial nerve tumor which is called an acoustic
neuroma. If you were suspected of having that, and you wanted the definitive test to find
out, which of these two would you prefer: the one which was in existence when I
finished my training, or the way we do it now?
The way we did it when I first went into practice was you took a needle, injected
peanut oil that comained iodine into the lower back of the patient, hung the patient upside
down by his feet, and allowed the peanut oil to run down through the spinal canal into
the inside of the head and tried to position that where we could then take X-rays to see
if there was something displacing the peanut oil. At the conclusion of that, we would
stand the patient back up, try and get the peanut oil back down into the lower back, and
get as much of it out as possible. That could be done sometimes, if everything went very
well, in an half hour or fony-five minutes. More typically, it took all afternoon.
Today, using MRI, we can get ten, maybe a hundred, times better information in
about fifteen minutes at a lower cost with no irradiation to the patient, practically no risk,
and very little discomfort. Now, which would you prefer? There is no issue here. So,
just because we have technology doesn't mean it's wrong.
We have a dilemma with changing demographics which is threatening the Medicare
program, to say the least, and perhaps threatening all of us. We have had this enormous
run-up in the number of elderly. And the elderly are obviously going to consume more
resources before they die. Well, what's the alternative to more elderly-fewer elderly?
We're victims of our own success, physicians and patients alike. The people in this
country have an insatiable desire to know what it takes to take better care of themselves
so they can live longer, healthier, happier lives. And they are demonstrating that by
fastening their seat belts, avoiding the use of tobacco and other substances, getting better
exercise, better nutrition, better rest. And the results are showing in the data as we
improve in spite of the social difficulty we have in the country.
So, just because costs are going up doesn't mean it's bad. On the other hand, we
have this dilemma which is not solved by many of the proposals which have been put on
the table. And that is, the person who is consuming the services is insulated from the cost
of the services. Think about what would happen if you did the same thing in any other
sector of our economy; if you insulated the people consuming the service or good from
the cost of that, what would we end up with? You would have runaway inflation. It's
no wonder that we have the dilemma that we have.
How do we achieve cost containment? We basically have two choices. This is the
bottom line. We are either going to have price controls, or we're going to establish
something we don't have now, a more effective market system. We do not have a market
system that works. Now, the dilemma with price controls, as economists know and
understand, is that they don't work. They have never worked in any segment of the
126 The Southern Business & Economic .Iournal
economy including the medical segment when they have becn applied. They never are
going to work. We can try !.hem, but !.hey are doomed to failure berore we start.
The reason that price controls don't work is they don't do any!.hing to cost. You can
control spending. But when you control spending and !.he cost of services goes up, you're
going to have rationing as a result.
Using price controls is like a physician who is confronted with a child who has a
middle-ear infection. That physician can treat that child with Tylenol and obtain some
symptomatic relief but that does no!.hing to the underlying basis for the disease process.
And it will only get worse. Price controls are like symptomatic relief. But they have no
chance of curing our problems. Nevertheless, rate setting is one of the two major
What do we mean by a "more effective market system"? Again, expanding the
choices; not limiting the choices, but expanding them in a pluralistic society. This means
having freedom of choice for patients and physicians alike with respect to our interactions;
not having central control that tells patients and/or physicians what to do in a given
In terms of the kind of market system alternatives that we're suggesting be put on the
table, our AMA policy advocates three options. That is, to have as an option for
employees in !.he private sector a managed-care plan such as you've heard described
today. To have usual, customary and reasonable (UCR) payments as part or !.he mix,
which is !.hat plan where the insurance company attempts to pay 80% of whatever the
charge is. And the patient comes up with the other 20%, after having met some kind of
The people in !.he insurance business give Medicare credit for dreaming up the usual
reasonable-and-customary system. No matter who did it, UCR, by attempting to pay 80%
of !.he charges, is an extremely inDationary mechanism. It's not unlike the defense
department cost-plus contracL<; in which the defense department would call up General
Dynamics or somebody and say, "Build me an airplane; however much it costs, we'll pay
it and some profit on top." Looking at it from the perspective of physicians, no matter
how altruistic they may be, when physicians are confronted with liability insurance
premiums, increasing tuition payments ror their children, and o!.her various practice and
personal expenses, they think if !.hey raise their prices up a little bit more, then the
insurance company will pay 80% of !.hat. The other 20% can be forgiven. They get
what they wanted. And !.he patient is protected. In other words, beneficiary protection.
All the wrong incentives arc at work in !.hat scenario.
On !.he other hand, usual, reasonable and customary belongs in the mix because the
potential for innovation with the UCR plan is very significant. You've seen some of it
in terms of the alternatives in the Coca-Cola plan, a creative use of UCR. There are all
kinds or interesting things !.hat can be done to reward patients for making the right
decisions with UCR. So, the AMA believes it belongs in the mix. It's not the end all
and do all.
The third thing we would put in the mix is what we call a benefit payment schedule.
The true name for it is indemnity. But the term "indemnity" was applied to UCR, and
there has been great confusion. So, we've decided to caillhis a benefit payment schedule.
Johnsonl.January 1993 127
This refers to that plan in which the physician sets his or her charges according to how
much it costs to deliver the service. The third party, be it insurance company or
government, sets its payments according to how much premium is being collected or how
much tax is being collected. It's up Lo the patient and the physician to work out what to
do with any difference between those two.
Now, having those three approaches competing with one another and having choices
between them means that each one of them has to compeLe for the favor of the individual
patient. And that's when we get close to the place where we can make the marketplace
begin to work. Once again, the notion is to expand choices, to let them compete with
each other for the favor of the individual.
In such a marketplace, the role of the government ought to be to set up the rules and
have us all play by the same rules; not Lo centrally control and tell patients and physicians
who does what. There is an analogy for that in a football game. Who can imagine
having a college or professional football game with no rules? It would be chaos. On the
other hand, having rules in place that everyone abides by enables offensive and defensive
game plans to be developed and modified as the need arises, with everybody playing on
a level playing field. So, setting rules is a very important part of the role of government.
Even within the private sector, we envision an important role of government, and there
would be a public/private partnership.
The program that we have to strengthen the health-care system in this country is
called Health Access America. From a standpoint of cost effectiveness, we would have
a market system developed empowering patients with the information to make the right
decisions. We would certainly have liability reform; override state mandated benefit laws
that make it so difficult for small-market reform. I'm glossing over the administrative
costs, not because they aren't terribly important, but because they have been well covered.
We need to get some handle on ERISA so that we don't have any unbelievable situations
like the one in Houston where a person had his benefit~ markedly reduced after having
had the audacity to get sick.
Legislatively, the U.S. needs to get back to what the purpose of insurance is, and to
spread risk and not avoid it; to have some kind of a market system in place that restores
some kind of economic discipline and makes the people consuming the services care
about how much it costs; and to have a system in which every person in this country has
access to some kind of uniform or Ooor of essential benefits, a universal coverage.
When looking for universal care, the ba<;ic goal is to deliver appropriate care in the
appropriate setting at the appropriate time in the person's illness, to the extent we can
accomplish that. No matter what financing system the patient picks, that ought to be the
goal that drives us.
How do we get to universal coverage? Once you sign off on the idea that you want
to have everyone insured, these are the only four ways: employer mandated, individual
mandated, tax financed, or some combination. The AMA has opted for an employer
We suggest that a tax-financed system makes no sense for the private sector. But in
terms of universal coverage, a government program for those outside of employment
128 The Southern Business & Economic Journal
An AMA program to strengthen
the U.S. healthcare system
• Universal Coverage for All Americans
• required employment-based private-sector coverage
• government programs for those outside employment
• uniform Medicaid benefits for all persons below the
• Legislation Should be Enacted
• to ensure that every American has health insurance
• to provide a uniform floor of essential benefits for all
• to establish a system of reformed market forces to bring
true economic discipline to the system
• to reestablish the principle that insurance should spread
risk, not avoid it, and that it should cover pre-existing
• to overcome "job-lock" based on fear of loss of insurance
with a loss or change of a job
• Cost Effectiveness
• establish true market forces, with patients empowered to
bring economic discipline to the system
• enact decisive professional liability reform
• override state-mandated benefit laws
• reduce administrative costs
• small-market insurance reform
• amend ERISA
• practice parameters
• ethical standards and professionalism
• support for medical education and research
• health promotion and disease prevention
Johnson/January 1993 129
settings does. We should work with the government to make them perform as well as
possible, just as we're interested in making any other government program work as well
as it can.
The AMA doesn't want payor play. Payor play means that the employer either
purchases the insurance from a insurance company or purchases it from the tax system
and pays some kind of capitaLed fee. We believe that is the back door to a single-payer
system. It would be very easy to have government over promise, under-fund, and shift
the blame for what happens to somebody else. We are opposed to "payor play" and in
favor of "play or else".
Regarding the people out there who don't have insurance, it is important to draw the
distinction between the public sector and private. Almost a third of the uninsured people
are individuals below the poverty line who should be in Medicaid but earn too much
money to qualify. They are a big group.
The decision that we have to make as a country is who ought to be covered by the
public sector. Part of the debate is whether we should be putting everybody in that public
sector or simply people who are financially disadvantaged.
The American Medical Association has a marvelous track record with respect to
getting people to participate in preventive care: promoting a tobacco-free environment
and fastening seat belts are just two areas. Our commitment to preventive care is very
At the same time, we're interested in having the right to establish and maintain our
standard of ethics and professionalism. That right has been abridged by the federal
government because of antitrust laws. We've sought to have an expansion of our
privilege to take care of ourselves, to get the government off our back and let us do our
jobs. We need to have ongoing support for medication and research.
Let's talk about patient advocacy. This is the underpinning of the notion of having
choice. But when we talk about having choice, we're not having patients shopping.
We're not talking about somebody presenting themselves at the emergency room deep in
the throes of a heart attack and holding his or her chest with one hand and with the other
thumbing through the yellow pages to find out who could conduct a coronary angiogram
at the lowest price. We're talking about a prudent prospective choice of financing
mechanisms during eillollment. We're talking about the choice of having each person
decide in the cool clear light of day on some primary-care physician; someone who will
be the patient's advocate, someone who understands and can respond to the fact that the
patient cares about how much things cost. It is a very significant concept. We want the
patient to look to physicians for advocacy. It doesn't have to be a family physician; in
the ease of a child, it might be a pediatrician; in the case of a woman, a gynecologist.
It could be the physician that you went to last.
One of the dilemmas with trying to promote primary care is the concurrent bashing
of people in specialties. That was best described in an article I read just this week in an
New Orleans newspaper quoting Dr. James Storer, who is Medical Director of Charity
Hospital in Louisiana. In comments he made with respect to the Association of American
Medical Colleges, he pointed out that people come to the emergency room hospital at
Charity Hospital for their primary care. But when they do so, they are frequently in need
130 The Southern Business & Economic Journal
of physicians with specialty training. One of the reasons people have gone into specialty
training is that we're not smart enough to know everything there is to know about a
broad spectrum of things. Within the field of diagnostic radiology, I have narrowed my
focus into using two or three imaging modalities. To try to do more than that is beyond
The magic word here is "balance" as we seek to promote primary care, as we seek
the opportunity to have a full life and to be paid appropriately for the kind of service
When you look at the health-care financing burden in the government sector, it seems
like it's almost out of control. But forums like this one today give us an opportunity, if
we just have the courage to attack the problem together.
In conclusion, the charge that everyone in the U.S. has is to try and understand what
the options are, to understand what the consequences of each one of the choices are. But
one of the things that we don't want to let happen is for us to fall into the trap that so
many people in this debale have fallen into; that is, to suggest that the individual patient
is too stupid to make decisions for himself or herself, given the right information. Rather
than underestimate the capacity of the individual, what the American Medical Association
would like to do is: Put the patient in the driver's seat!
Kuttner/January 1993 13]
HEALTH-CARE REFORM PROPOSAL
Thank you for asking me here to discuss the President's health-care plan, even though
the president whose health-care plan I know best lost the election.
I want to spend a bit of time on the objective facts of health care today. I also want
to share with you my analysis of the historical moment in which we find ourselves and
suggest what that says about where we go next. This is where I might have talked about
President Bush's plan for health-care reform. But it's also convenient for me that many
points of the Clinton plan presented during the campaign have an uncanny resemblance
to the Bush plan. But there are a lot of differences, too.
In the interest of total disclosure, I'll talk about the things that define the differences
between the Bush and the Clinton approaches. And then I'll bring it all together at the
end and offer my candid assessment of where things might go in the coming months and
There are few issues that can affect every American in the way that health care does.
It's important to note that when Americans are asked about their health-care system, they
like the quality, but they express serious concerns about the cost of that system and their
access to care. What has made health care a salient issue in the political debate is its
cost. If health care didn't have the economic implications that it does, it would not be
the subject of this conference today.
The trends are ominous, and they are significant. Disproportionate shares of
government budgets go to health care. As those costs rise faster than costs in general, it's
particularly hard on governments, especially those that have more fiscal accountability
than the government in Washington. The federal government is distinctive in that it
doesn't have the requirement that it balance its budget. Rising costs are on a trend that
cannot continue. The growing percentage of income spent on health care will have to
stop or everyone will be in the health-care business!
Let's look at what society is doing for people in need and compare the relative drums
of health care versus other services. First, the Medicare benefits. This year in Jefferson
County, Alabama, the cost to the federal government for the average 65-year-old supplied
with the Medicare benefit package is $382 per month. In Montgomery County, it's $303
dollars per month.
At the same time, people in need, who are penniless and age 65, qualify for the
Supplemental Security Income Program. And the maximum benefit they receive is $422
·Associate Director for Health and Social SerfJices Policy, Office of Policy
DefJelopment, The White House, Washington, DC.
132 The Southern Business & Economic journal
per month, $633 for a couple. This means that the government is spending more on a
couple's health care than it is to keep them off of the absolute bottom of material
deprivation. That's one of the problematic points of health care.
We hear the question, "Is the amount of health-care spending the optimal amount?"
It's probably not. Economists give us conclusions about why it may not be. But, the way
to find this optimum is not through market forces with price-based competition as the
normal mode of doing things. The line about democracy being the worst system of
government except for all others probably applies to our health-care system. The present
way of figuring how much we spend on health care is probably the worst in the world
except for all others.
And that's what the last election has set up as being the most important issue in the
coming months, because there was a grand debate on the question of how one gets at the
right amount of health-care spending. I would argue that there is no formula to tell you
when you're spending enough, too much or not enough. Society should approach health
care like it approaches other sectors of spending. The total amount that should be spent
should be the amount that arises from summing up the purchases made by some 250
million Americans living in the 50 states. That's an amount that you should derive from
decisions made by people living in new suburban developments and old country
crossroads as well as those decisions made by physicians treating newborns in an
intensive care unit and individuals buying over-the-counter medications when they haye
the flu. There is no computer program or government committee that can take the place
of all these decision makers.
Yet, President-elect Clinton has argued otherwise. In his campaign, he offered a very
different vision of how we should get at the decision of what should be the total spending
on health-care services. And the most striking thing about this debate is that it arises
because it has become the conventional wisdom that we're spending too much on health
care. But think about that. Compare this to another growing area of our economy,
telecommunication. Costs are rising. From 1980 to 1989, total spending on U.S.
telecommunications rose from $67 billion to $134 billion. But we don't see people
running around and saying, "We've got to stop the proliferation of fax machines and other
In health care today, you can buy so much more capability than a generation ago.
Technologically, what we're able to do for people is an important fact, an astounding fact.
But it seems to be the case that in the health-care system, unlike some of these other areas
where technology is also doing amazing things, we somehow want to feel bad and want
to run away from this phenomenon of modern technological life.
But as govemment thinks about these things, we've got to come back to budgets.
State constitutions require a balanced budget. But the federal health-care trend shows that
the federal budget will all be health care if the trend lines are drawn out long enough.
It is interesting how this relates to other types of government spending. Defense's
share is shrinking and that has an effect on a state like Alabama. Alabama, according to
the statistics I looked up, pays in 1.21 % of all the federal revenue, but receives back
1.74% of defense money. By the end of the century, federal spending on health care in
this state is likely to make a greater contribution to the Alabama economy than defense
spending. That's a reality and an important one to ponder as our program moves to
Kuttner/January 1993 133
focusing on regional and state concerns about the health-care sector. I would encourage
you to think about the potential for economic growth of the Alabama state economy,
through import and through export.
In health care, this means providing services which people are now seeking elsewhere
and providing services which attract people from beyond this region. As health care has
shown an increasingly technological capability, it requires economies of scale often not
obtainable in rural areas. That means a net flow toward urban areas in the process of
health-care services becoming more specialized. There hasn't been much rural hospital
construction in the southeast since 1974. At the same time, it's hard to think of an urban
hospital that has not undergone some major construction in the last five to seven years.
All these cost factors are confronting our political system, which has to be the
mediator between all the forces. And the problem is that Americans have feelings, not
policy views, about health care. That's a problem for politicians because when politicians
act ahead of sufficient public understanding, they get in trouble. Recall what happened
when Congress tried to invent a catastrophic-benefits Medicare program. Congressman
Rostenkowski, the Chairman of the House Ways and Means Commiuee, is unlikely to
forget what happened when seniors decided they didn't like the program. In one telling
moment, an elderly constituent chased the Congressman with her cane, saying she was
going to do great damage to him if she ever caught up with him. Conveniently, the
Congressman had twenty years and twenty feet on his angry constituent, and he escaped
bodily harm. So, we're not starting off with a good base for ordinary folks to be
appreciative of what it is the government is about to do for them.
An organization that tries to increase public awareness is the Public Agenda
Foundation, which was founded by a former pollster. He wants consumers to think about
more than mere opinion that the polls are capturing. What the Public Agenda Foundation
has done in going beyond the polls is to ask people, "What do you think about the health
care system? What do you think about the dynamics of the problems of rising costs, the
problems of access?" What they found is that the number one problem that the general
public focused on was greed, a greed on the part of insurance companies out to make
excess profits, a greed by malpractice lawyers who wanted to profit, a greed by doctors
bent on being super rich. The Public Agenda Foundation found that ordinary people were
offering very diffcrent explanations of what's going on in their health-care system than
that offered by health-care analysts. Analysts, as those on this program, focus on things
like the aging population, the greater availability of technologies, and economic anomalies
like the consumer not taking price into account when dcciding what health-care services
So, this divergence holds the potential for legislative disasters at the national level,
like catastrophic health insurance all over again. And it's the kind of thing that perhaps
summed up all this contradiction by one particular person that the Public Agenda
Foundation talked to. He said, "I want national hcalth insurance; I just don't want the
government to run it."
And this brings us to where we are right now in the collision of health-care analysis
in this country. In the 1988 elcction, the American people had a choice between one
candidate who said he would make health care a central focus of his administration, and
another candidatc who didn't talk about it too much. The Amcrican people chose the
candidate who didn't talk about it too much. In 1992, the Amcrican people had two
134 The Southern Business & Economic Journal
candidat,es who had distinct visions of the health-care system. But this time, when they
chose a candidate they .said they wanted to have health-care reform and implicitly chose
a vision of what that reform should look like. Of course, the differences may not have
been so obvious since boLh Bush's and Clinton's programs came out very similar. By the
time the Clinton campaign came up with its final health-care plan efforts, it was a plan
that incorporated much of the President's plan emphasizing obtaining universal insurance
coverage through pri vate plans.
There were a number of areas of clear agreement. The one I would point to is
insurance market reform. This had a broad consensus of opinion, and those who
controlled the legislative process in Washington could have passed it this year. This
would have made for radical change in Lhe insurance market faced by small employers.
For the largest employers, of course, there is self insurance. And even when not
self-insuring, the law of large numbers applies; that is, when you've got a large number
of lives being insured, one very expensive person is not going to make that much
difference in the average cost for each employee. But for small employers, with nearly
half of the Americans in the work force, one costly sick person can make a real difference
in the insurance rates. In small groups one sees a contradiction of thc purpose of
insurance, i.e., to spread risk broadly.
There was also a consensus that we needed incentives in the marketplace to generate
the lowest competitive package for these small employers. The National Association of
Insurance Commissioners put together a set of recommendations involving significant
changes. These reforms would require every insurer to take all the risks that present
themselves and to sell insurance to everybody who wants to buy it from that insurer, no
matter how risky the group is perceived to have been. This would end the practice of
certain sectors of employers not being able to get coverage.
Secondly, insurance contracts would have to be renewable. Current strategies
followed by some in the insurance market of reaching the optimal risk level by
periodically reviewing who they are insuring and dropping the sickest groups would cease.
Finally, insurers would have to take all members of an employee group. Individuals
could not be medically underwritten out of a particular group. Also in the broadest set
of reforms affecting more than just small groups, preexisting-condition clauses that
exclude conditions people have coming into a particular plan, would be curtailed.
Beyond these, both the Bush and Clinton plans featured new forms of purchasing
groups. The Bush plan had health insurance networks to encourage small groups to band
together to buy insurance cooperatively as a group. The Clinton plan talked about
networks on a grander scale but with less detail, and with a higher level of integration;
that is, not just going out and purchasing insurance together, but going one step further,
vertically integrating by negotiating with providers, with groups of physicians, with
individual physicians, with hospitals.
Another important area of agreement between the Bush and Clinton approaches was
in automating paperwork and doing away with a lot of needless transaction costs in our
health-care systems. This involves the use of data-embedded cards, cards like credit
cards, that help to speed up Lhe process of verifying whether somebody is insured. And,
as Lhat concept advances, embodying information on the card about the patient. A further
Kuttner/January 1993 135
change, in the long term, would be the application of electronic record keeping, making
hospitals more electronic-information-intensive places than they are today; health-care
records that are today in paper form would be converted to electronic form.
But, our political campaigns don't exist to emphasize all these points of likeness.
Political campaigns emphasize the differences in candidates' approaches. And, while a
similar thrust emphasizing universal coverage was present, ways of getting from here to
there could not be more different. Certainly, this is true in two areas of the debate: access
to care and containing costs.
In the Bush plan, access would be predominantly a feature of 1) making the insurance
market an easier place for small employers to obtain insurance, and 2) looking at the
affordability side of the problem, because half of the people who are without coverage are
people with incomes at or below the poverty line. Looking at the financial accessibility
side, that's something that could be assessed through tax schemes and tax deductions to
make health insurance more affordable.
The Clinton plan, by contrast, focused on mandatory participation by employers,
moving away from pay-or-play, with employers facing no alternative but to provide
insurance to all their employees. The salve to businesses would be, quoting directly from
the plan, that there would be "tax credits to protect businesses," so that the employers
could deal with the burden.
On containing costs, again there were two very different visions. The Bush plan
followed the argument that in a country with our diversity, we are best served by the free
market deciding how much we should be spending on health care. The Clinton plan made
a very strong promise, a promise I would call an audacious promise, that health-care costs
would not grow faster than incomes. When one looks at the health-care-cost trend lines,
it's going to take a turnaround to achieve this goal. It will make Ronald Reagan look like
a piker in its ambitions for cutting the cost of the Medicare program.
A proposed national health board as a device to achieve these savings could be,
potentially, a very powerful thing. On the other hand, it could just turn out to be a jaw
boning activity like inflation fighting in the Ford administration and then in the Carter
administration. However, to keep health-care costs from increasing at a rate no faster than
the rate at which incomes are rising, then we're going to have a style of regulation not
heretofore seen in our health-care system. It has potential for being a very rigid,
regulatory approach. And immediately it thrusts itself into conflict with some deeply-held
We would have to have central forecasting, someone to be in charge at the national
level. Then each state would have to have an agency so that each state is assured that
health-care costs are not rising fa<;ter than incomes. This would constitute a significant
shift of power. Whatever is established, some agency not present in the dynamics of the
health-care system today is going to have a lot of power. A lot of power is going to seep
away from physicians and hospital boards and hospital administrators and others, towards
this new power structure that would be created.
Let me bring my remarks to a close with some predictions. First, a hundred days'
construct for health-care reform is unlikely. Having been involved in the process of
136 The Southern Business & Economic Journal
developing a comprehensive plan in the Bush administration, and taking it from the
1) what are our ideas?
2) what are our plans?
3) what are the specifics of the plans?
4) what are the pieces of legislation that we need for our plan? and,
5) writing the legislation that will meet those plans;
that is much more than a hundred days' process, especially since the Clinton
administration is starting without a comprehensive plan.
One thing I look for is some clever ways to mark time during this hundred days
period. Going around the country asking in an Oprah Winfrey style, "What do you think
about health care?" Your national leader and national talk-show host.
Second, if in this process, the pay-or-play approach lasts, that is, everybody is going
to be providing insurance whether they have been thinking about providing insurance or
not, it has a strong probability of going the way that it did in Massachusett", Despite all
the talk in the 1988 campaign about what was done in Massachusetts, the program still
hasn't taken effect there, Why? Because every time the effective date approached, they
would realize that it would have horrible economic consequences for the small businesses
in the state. So, they put off the date by which that mandate takes effect.
Finally, not a prediction but a hint. Watch George Mitchell, the Senate Majority
Leader. In 1991 something could have happened. We could have had legislative action
at the national level; we could have adopted those health-care reforms that everybody
agreed upon. But that did not happen because Senator Mitchell decided he wanted to
keep it from happening. Already Senator Mitchell has circulated a letter to then-candidate
Clinton saying, "We look forward to hearing your ideas about health-care reform. But
rest assured that we will be doing the legislating." And this has the potential for having
the real element of nastiness to it as that dynamics plays itself out.
No matter who the American people chose to be President, they were choosing a
candidate who said that there would be change in the health-care sector. And so, as a
representative of the administration that's looking at the sunset rather than the sunrise, I
would say, "Hold onto your scats." When the talked-about change that challenges some
of the basic values that influence our country's health-care system is attempted, there is
sure La be conflict.
Kellogg/.January 1993 137
AND THE FlITURE ROLE OF
Terry D. Kellogg·
I'm going to make a few predictions about what managed competition may have
embodied in the reform of health care and then try to draw some obvious implications
from that. mostly for my industry, and try to apply that to the Alabama marketplace. I've
used for my model of health-care reform The Managed Competition Act of 1992 (H.R.
5936 and S.R. 3299). That is the proposal of the Conservative Democratic Forum.
The basic idea would be to create three entities. The first one, and perhaps one of
the most important, is the health-plan purchasing cooperatives. This would become the
exclusive vendor of health insurance to smaller employees, and each cooperative would
cover a given geographic area. All small employers would buy their health insurance
through the cooperative. They would choose an array, or a list, of carrier companies that
would offer coverage to their constituent group of employees. The choice of carriers
would be the employee's choice, which is in opposition to the situation today, where the
employer chooses the carrier and the coverage. Presumably, the cooperative might do
some other things. They might do as much as enroll the employees, collect premiums,
and distribute the reimbursemcnt to the carriers. But, ccrtainly, they'll handle comparative
shopping and help distribute some information about customer satisfaction.
In order for a carrier to participate, or a company to participate, in what's called
managed competition-I call it regulated competition-carriers will have to be qualified
or certified to be accountable health plans. I do like that phrase because presumably
that's what it would embody: holding insurance companies accountable.
In the current marketplace for small employers the basic concept is, if you're sick,
you can't get the coverage. If you get sick, you can't keep the coverage. That would
rapidly become a thing of the past. It would require insurers to do certain things. It
would require them to come close to strict community rating, eliminate medical
underwriting in mosl situations, and be very restricted in the applicalion of limits for
pre-existing conditions with regard to coverage. Accountable health plans would be
required to offer the standard plan of benefits, or minimum bencfil plan, if you want to
call it that. Any additional coverage, or any innovative coverage, would have to be priced
separately and operate supplemental to the basic policy. Il'S likely that the tax-exempt
benefit limit, the amount of tax-exempt premiums for health insurance that an employer
could pay on behalf of employees, would be limited to the basic benefit plan, either the
average price or the lowesl price available through the cooperative in the geographic area.
'Vice President, Actuary, Blue Cross and Blue Shield of Alabama.
138 The Southern Business & Economic Journal
That would become the benchmark price above which health insurance paid on behalf of
employees would not be subject to the same favorable tax status that it is today.
The third entity that apparently would be created would be the National Health Board.
The principle accountability of the National Health Board would be to define those basic
benefits referred to in the act as basic uniform effective health benefit<;. That would
include some well-child care and emphasize preventive services. Since tax deductibility
of employer-provided health benefits will likely be limited to the benefits under this plan,
the lowest priced plan perhaps, the scope of those benefits is critical. It's critical to
carriers and to provider groups. It will effectively change the venue of provider group
and coverage mandates from state legislatures to the National Health Board and to
What will insurance companies do? Certainly, insurers will continue to take the
underwriting risks for smaller employers on the financial side of the proposition of
providing health insurance. No small employers are in a position financially or have the
ability to spread risk to take on self-insurance. I think insurers will continue to make
coverage decisions regarding medical necessity and experimental versus investigational
procedures. Increasingly, insurance companies may be decision makers in the evaluation
of proven medical effectiveness for different treaunent plans and medical protocol.
The Alabama Healthcare Council was mentioned earlier. Organizations like this will
probably step in to make differential comparisons between specific providers. But overall
treaunent-plan protocol will probably fall back on insurance companies.
There are about 1500 licensed health insurers in the United States. But in any given
marketplace in a geographical area, there are probably less than 50 competitive and
effective health insurance companies in operation. In Alabama, I would be hard pressed
to name 30 competitors that are both competitive in their pricing and effective in this
marketplace. However, that is nOl to say there will not be significant and consistent
consolidation of the health insurance industry throughout the country. Standard and Poors
recently announced through a press release that !.hey are making major changes in their
rating criteria for insurance companies. This will reflect the amount of revenues derived
from health coverages, the regulatory environment in which the carrier operates, and the
extent of investment in managed-care products. Significant industry consolidation is
What are some of the specific requirements that carriers would have to comply with
to have "accountable health plans"? Obviously with regard to rating limits and
underwriting, carriers that use the most aggressive practices will have their operations
impacted severely. Most members of Congress support community ratings or something
very close to it. This means that everyone within a community pays the same premium
regardless of their health status or claims history. The arguments made by many insurers,
including Blue Cross, is that this would serve to punish those who have used less
restrictive praclices in the past. Logically, as a consequence, we may have attracted more
adverse risk in our rating pools. Further, because of having Laken those adverse risks, we
may have higher cost products, be less competitive, and perhaps be unable to provide
coverage for premium below the tax-exempt base. In my opinion, and based on extensive
modeling that's been done by actuaries, that is true in !.he interim.
Kellogg/January 1993 139
But over time, that could be offset by the leveling of the competitive playing field.
And it will be wholly offset by any form of employer mandate that sweeps the currently
uninsured population into the rating pools. Carriers with a very poor risk mix going in,
and with a low to inadequate amount of capital, might not survive the transition.
Also critical is what type of mandate, if any, occurs. If employers are merely
mandated to offer coverage, the selection mix of the covered population is probably not
going to improve very mUCh. If employers are mandated to offer coverage and pay for
all or pan of that coverage, the risk pool characteristics could improve dramatically.
We will also be interested to see how the guaranteed issue of product is designed.
Unless this requirement is imposed on all products and all coverages, there will be little
or no effect on the access to coverage for small employers. In states where that type of
reform has been enacted, individuals with impaired health status showed improved access
as a result, but most companies had been very successful in avoiding selling guaranteed
issue products. It's like having your enrollment desk on the eighth Ooor of a building
with no elevator.
The Alabama market is likely to be affected by both of these changes less so than the
rest of the country. There is, and continues to be in this state, a large and successful
health insurance company that has continuous openings on a community rated basis for
all small employers of three or more employees. As a result, this type of reform will not
improve access or cost very much for small employers who currently provide coverage
for their employees. For employees who work for employers who do not currently
provide coverage, the presence of a mandate might improve access dramatically.
Nothing in the statutes describes minimum loss ratio requirements. What do they
mean by minimum loss ratio? Probably it means holding health plans accountable. But
in the purchasing cooperative concept, ongoing operations in the cooperative would hold
insurance companies accountable for the portion of premiums received that are returned
in benefits. If that definition of loss excludes agent and broker commissions, then carriers
with captive distribution systems will certainly be advantaged. Similarly, carriers with
significant provider discounts and carriers with low administrative expenses will have the
same advantages. They will be more able to comply with whatever standards are imposed
and maintain the profitability of their market. All of that is totally consistent with the
original notion of encouraging provider networks in selected contracts.
Here is a short list of what might characterize the most successful accountable health
plans. They would have a broad network of popular and attractive providers. Those
providers would be compensated in a manner that would be perceived to be win-win on
the part of the parties involved. Carriers would have excellent customer service since the
purchasing and retention decision of the carrier will be made by employees as opposed
to employers. This will very likely precipitate a change and reallocation of the
expenditures of insurers towards more advertising and public relations, lower
administrative and distribution expenses, and fewer paper barriers to reimbursement. That
occurs for two reasons. One would be a move toward a standardized benefit plan, and
another would be to move away from fee-for-service and toward capitaled reimbursement
of services for providers. A third one would be a reduction in the number of purchasing
140 The Southern Business & Economic Journal
As an example, in this slate if cooperative purchasing were mandated for all
employers of a hundred or fewer employees, that would reduce the number of group
decision-maker purchasers in Blue Cross by 95%. That would only represent 15% of
revenues. But they would reduce the number of decision-maker purchasers by a little over
95%. Surviving carriers will be much more customer-service intensive and less marketing
intensive in their activities and in Iheir expenditures.
A last point on cooperatives would be that today there are just two successful
strategies for heallh insurers: one is cherry picking, the other is selective contracting. One
is concerned wilh avoiding risk while the other is aimed at efficiently purchasing and
managing care. The large employer and Ihe self-funded market are well down the road
toward selective contracting.
The maximum employer group size that would be subjective to a purchasing
cooperative mandate then becomes a critical choice in the upcoming political debate. The
amount of the marketplace that will be controlled by the purchasing cooperative will make
all the difference in the future magnitude of open choice, self-referral medical practice.
This limit will determine Ihe extent in which agents and brokers will continue to be
involved in the distribution of heallh insurance.
Finally, since Ihese organizations will be quasi-governmental if not fully governmental
agencies, they will tend to further politicize the process. They will politicize Ihe selection
of carriers. They could politicize the selection of provider groups. They will probably
tend to freeze the existing apportionment of health-care expenditures in place between
provider groups. They could simply be the precursor to a national heallh administrator.
Herrmann/January 1993 141
HARD CHOICES FOR ALABAMA'S FUTURE
Carol Herrmann *
I give this statement as a Republican. We now have an election process that is
finished, that is completed. And even for those of us who may not have voted for the
person that won, it's over. We now have the opportunity before us to put our hands into
the process of change. I almost want to say, the "C" word. I'm so tired of hearing
change, change, change. But we are going to be going through tremendous changes.
Those of us that have been involved in health care over the past three years in Alabama
have witnessed change unlike any we thought we would ever see. That was only a
precursor to what we're going to see on the federal level. What is exciting about
President-elect Clinton is that he understands, by being a governor, what it means to have
to balance a budget on the state level. He understands the relationship between federal
mandates and state budgets. And he understands what it means to look a hospital
administrator, and to look a nursing home administrator, nurse, and other practitioners in
the face and have to say yes or no on cuts in the Medicaid budget. I think that will bring
a different dynamic to the Presidency that we've not seen before. What I would like to
do is encourage everyone to participate in the process.
One of the things that I worry about is the frustration and the change being so great
that we opt out. Those of us in the state of Alabama that have made change happen have
worked together unlike any other state, and I have been in a lot of different states. The
groups, different provider groups, state agencies, and other private entities work together
better than I've seen happen in many other states. We need to build on that and become
recognized as a force for positive change on the federal level.
There will be hard choices for Alabama. We are not going to be able to continue as
we are now. We have got to come to understand who we are and who we want to be in
the health-care system. We can talk about economic opportunities and how the health
care system is positive or negative in the economic system. But the health-care decisions
we are making are not only economic decisions, they are decisions as to who we are on
an ethical basis. What kind of people do we want to be? What types of services do we
want to provide? Do we want to be the type of nation that excludes a large portion of
the population? And those are people unemployed, who are not in the work force and
don't have access to health coverage by paying for it themselves. Those are questions
we've got to decide.
Once the decision to have a health-care system that covers everyone is made, you
have two other decisions to make immediately. First, how are we going to pay for it?
Either raise taxes, something none of us like to hear, but I'm tired of hearing people say
"no new taxes" and then turn around and say they want services to be expanded. They
'Health Care Consultant.
]42 The Southern Business & Economic Journal
don't understand why they get turned away at the emergency room, or why this isn't
occurring or why that isn't occurring. We must understand that to have adequate services,
it will Lake new revenues for the system, especially in Alabama which historically has
under funded social-service programs. I'm not talking about throwing money willy-nilly
at the federal government, I'm talking about responsible accountable tax increases, or
funding increases, for the state agencies that fund our health-eare services.
If we don't want to pay for it, and if we don't want to admit that we need new taxes,
then we've got to ration health care-we already ration health care. I'm delighted to say
that's Commissioner Moore's responsibility now at the Medicaid agency and not mine.
But if anyone thinks that health care is not being rationed in the state of Alabama, they
are sadly mistaken. Three days after Laking the job as Medicaid Commissioner, I had to
decide whether we were going to cover a liver transplant for a three-year-old child. ]'m
a soft touch. That child got her liver transplant, and we paid for it because I was not
going to look a mother in the face and say, "We're going to deny your child a 20%
chance of living." It just was not going to happen. That's the type decision we're going
to have to make if we choose not to raise taxes or raise the revenue that we need to fully
fund our health-care agency.
Everyone has commended the Oregon health-care plan. It was a wonderful plan. But
the most interesting thing about that plan was that they had the guts to rationally ration
health care. They had a long formula. But they had a quality of life indicator that makes
me nervous. And everyone thought it was wonderful. Well, if the people in Oregon
thought it was so wonderful, why isn't this plan implemented for the slate employees, the
retired teachers, and the retired employees? If it's such a wonderful plan, why aren't they
rationing health care for those that can afford to pay for it? That's not what they were
out for; the only thing they wanted to ration was health care for the poor. I don't think
that's the type of nation we want to be.
I'm going to close by repeating this statement: do not opt out of the system.
Regardless of what your political beliefs are, regardless of what you think, each and every
person is going to have to be aggressively involved in the system to make sure that when
President Clinton comes into office that we have a plan that works for Alabama, not just
a plan that works for California or New York. We're all going to have to roll up our
sleeves. It was exciting when he talked about a sense of community in his acceptance
speech, that we all live or die on that sense of community. And our destiny is wrapped
up in that sense of community. And Alabamians, especially those that have been so
aggressive in reforming the health-care system here in Alabama, need to be the leaders
in that process. The potential is there.
Butler/January 1993 143
HEALTH-CARE COSTS AND COST
CONTAINMENT AT BLOUNT, INC.
Blount is an international manufacturing and construction company. Our stock is
traded on the American Stock Exchange. We're ranked 439 in the Fortune 500. Last
year we reported over $600 million in sales and revenues. We've been going through
some restructuring and our operating income was $22 million for fiscal year 1992. The
cost for our medical plans-not dental, disability income, life insurance or other types of
employee benefits-just the medical plans, was about $6.5 million, about ten times our
net income for last year. So you can understand that Blount's very concerned with the
cost of health care in the United States, particularly in Alabama and the other 32 states
where we have a major business presence.
Today, I'll emphasize Alabama as much as possible as I touch on three areas related
to containing medical costs for Blount
1. Our current cost situation.
2. What we've tried in the past.
3. What we're looking at for the future.
CURRENT COST SITUATION
The costs I'll taIk about concern approximately 2400 U.S. employees. We have
another 1500 or so employees, most of whom are located outside the United States. Two
hundred eighty of these U.S. employees we call Montgomery-based employees. They
work either for Blount's corporate office or the Construction Division's headquarters.
About 180 of these employees live with their families in Alabama. The other 100
employees live in states where we have construction jobs, but they're paid out of our
I've just completed projecting costs for calendar year 1993 for these 2400 employees.
It appears that our total medical-plan cost will increase about eight percent in 1992.
However, if we follow the expected national trend for 1993 medical-plan increases, we'll
experience a 20% increase in 1993. Our total medical-plan bill could be over $8,000,000
by just next year. (See Table 1.)
We offer two self-insured medical plans to these 2400 employees. Last year, our
average cost per employee ranged from $ I822 for employees in Portland, Oregon to
$7653 for a small construction company in Los Angeles. Montgomery-based employees
had the next highest cost, $3407 in 1991.
'Certified Employee Benefits Specialist and Manager of Employee Benefits, Blount,
144 The Southern Business & Economic Journal
Table 1. Blount Medical Plans: Total Cost
Calendar Year Medical Change
1991 Actual $6,380,599
1992 Estimated $6,914,744 +8.4%
1993 Projected £8,310,425 +20.1%
Our dental plans cost anywhere from £400 to $600 per employee per year. That's our
current cost situation.
PAST EFFORTS TO CONTROL MEDICAL-PLAN COSTS
Over the years, we've adopted many of the same cost-containment programs that
other companies have, including
Increasing employee cost sharing
Hospital utilization review
Second surgical opinions
Medical case management
MentaVnervous/substance abuse: $40,000 lifetime maximum
Chiropractic care: $300 annual maximum
TMJ (temporomandibular joint) treatment other than surgery:
$1500 lifetime maximum
Optional HMO (health maintenance organization) plans
These programs do save money, even though some of the savings are difficult to quantify.
Our health-care costs have continued to escalate, but at a slower pace.
One area where we've had some success in controlling costs is with HMOs. We
offer HMOs in two areas: Montgomery, Alabama and Portland, Oregon. This chart (see
Table 2) looks at Blount's 1991 medical plans costs with and without HMOs.
Table 2. Blount Medical Plans: Average Cost Pcr Employee, Calendar Year ]991.
Insured HMO All
Company!Location Plan Plan Plans
OCSDlPortland, Oregon $1822 $2602 $2]55
FED & IED/Minnesota; North Carolina; Wisconsin 2559 2559
All Blount Locations 2638 26]6
SED/California; Idaho; Wisconsin 2790 2790
Blount/Montgomery, Alabama 3407 2362 3011
Pozzo/California 7653 7653
We first offered the HMO in Montgomery in January 1991. The first-year cost for
the HMO was $2362 per employee. That's $1000 less than the self-insured plan. Any
fears we had of adverse selection appear to be unfounded. Our average cost per employee
for the self-insured plan the preceding year was about $3600. The first year with the
HMO, our average cost for the self-insured plan dropped to $3407. One hundred fifteen
employees are currently enrolled in the HMO.
There are all types of HMOs, preferrcd-provider organizations and other types of
managed-care arrangements out there. We believe it's important to look at them closely
before making a choice. The Montgomery HMO offers features that we believe will
produce cost-effective health care for Blount employees:
• It's a capitated plan. The employee's primary-care physician is paid a
certain amount to care for the employee and family during the year. This
physician has a financial incentive to provide adequate, but not excessive,
• The organization has quality programs in place. They measure hospital
outcomes, review physician practices, and follow continuous quality
improvement techniques. That's important, because we don't want to
save money and at the same time jeopardize our employees' health.
• The providers are accessible to our employees. They're located
throughout the Montgomery area. Many employees didn't have to change
doctors when we added the HMO.
Portland employees have had an HMO option for a number of years. It's a staff
model HMO, with hospitals and doctors exclusively for HMO members. The chart shows
that the HMO costs more than the self-insured plan. However, employees are willing to
pay more for their HMO coverage. The company has made equal contributions to the
self-insured plans and the HMO every year except two. The last two years the self
146 The Southern Business & Economic Journal
insured plan cost was extremely low, and Blount subsidized the coverage to make it a
viable option. No subsidy will be necessary in 1993. This HMO has a very loyal
following of 30% to 40% of Blount's Portland employees, about 350 employees.
For 1993, the Montgomery HMO has advised us of a 12% premium increase, the
Portland plan increase is 7.3%. We think HMOs work and we'll continue to look for
acceptable managed-care programs for our employees.
I mentioned quality earlier. Quality is a real issue anytime we start guiding our
employees or others toward health care. In our businesses, Blount knows that quality
costs less. When we pay as much as we do for health care, we want the dollars to be
well spent. We were encouraged recently by the development of quality measures for
hospitals and their doctors, and particularly the clinical databases that track patient
outcomes. These measurement systems can be very useful. Hospitals and doctors can
use the information to benchmark clinical processes and continue to improve quality.
Employers and employees can use the data to find cost-effective, quality providers. By
letting the data speak, all of us can work together toward a better health-care system.
One company may not be able to inOuence a regional health-care system, but a
coalition of employers has a voice. Blount's a member of the Alabama Healthcare
Council, an employer coalition based in Birmingham. The Alabama Healthcare Council
is working on a pilot program for Birmingham, a key component of which is a quality
measurement system for clinical outcomes. Several hospitals are partners in the pilot
program. Similar programs have been successful in other areas-they save lives and they
save money. These efforts are a very positive approach to health-care delivery for all of
In conclusion, I've been talking about Blount's experience and Blount's costs. We're
also part of the bigger picture. If nothing else, we pay taxes and we know a portion of
our health-care cost is the result of cost shifting. Very soon the federal government will
become more active in improving access to care for all Americans. The states will no
doubt have a big role in implementing these programs. We believe what works for us
will also work for these new programs. Managed health care, guided by quality standards
and continuous quality improvement, is essential to keeping such services affordable.
Bentley/January 1993 147
THE HOSPITAL PERSPECTIVE ON RISING
William C. Bentley·
So iliat we may make some direct comparisons with healili care in oilier countries,
here are some tables that might be of interest. The first one is from an article that I
recently reviewed iliat compares the Scandinavian countries of Sweden and Denmark wiili
Minnesota. Table 1 shows ilie populations of Sweden at 8.53 million, and Denmark at
5.13 million, compared to Minnesota's 4.38 million. The white population represents
100% of the population in Sweden and Denmark and 94.4% in Minnesota. The
population over age sixty-five is higher in Sweden (17.8%) and Denmark (15.5%) ilian
in Minnesota (12.5%). But income per capita is higher in Minnesota. Overall, they are
Now, Table 2 provides a comparison of healili status and costs. As a percentage of
the gross domestic product, health care in Sweden consumes 8.7%, in Denmark it's 6.2%,
and in Minnesota it consumes 12.4%. That is one of the telling points. The per-capita
costs are considerably higher in Minnesota. That's ilie second telling point. We're
spending more in the U.S. Remember iliat Minnesota is one of the most advanced states
in ilie United States in utilizing the managed-care model. They have the Mayo Clinic,
Paul Elwood, and all kinds of HMOs in Minnesota.
As far as life expectancies, there is not a great deal difference. Minnesota's is just
about the same as Sweden's. Denmark didn't fare quite as well, and you'll understand
why in just a moment. The infant mortality rates per iliousand are about the same in
Denmark and Minnesota, with Sweden somewhat lower. These are 1989 statistics.
Table 3 shows some of the behavior patterns iliat might account for some of iliese
differences. In the first line, you see iliat the Swedes eat slightly more meat ilian we do
in the U.S, about three times as much butter, but about 60 percent as much alcohol and
use slightly less tobacco.
In Denmark they are a lillie more relaxed. They eat a lot of meat, a lot of bUller, and
they drink and smoke a lot. They paid for all that excess in a lower life expectancy. The
U.S. is still the worst for smoking in the group, but has cut back on the consumption of
bUller. These tables bring home the point that we spend more in ilie U.S., but we don't
get a lot more for it. Tables 4, 5, 6, and 7 provide expanded information on this subject.
Now, let's examine some data from here in Montgomery. This information is taken
from a table of vital events published by the State Department of Public Healili. Data are
for 1990 and came out two or three months ago. The document contains all sorts of
'Senior Vice President and Administrator, Baptist Medical Center, and Alabama
Hospital Association Board of Trustees, Executive Committee.
148 The Southern Business & Economic Journal
Table 1. Three "Scandinavian Countries" Demo~hics
Sweden Denmark Minnesota
Population in Millions 8.53 5.13 4.38
White Population 100%* 100%* 94.4%
Population Over Age 65 17.8% 15.5% 12.5%
Income per Capita (1988 Dollars) $14,722 $13,555 $16,472
Source: Statistical Abstract of the United States, 1991.
Table 2. Health-Care Comparison: Sweden, Denmark and Minnesota
Health Measure Sweden Denmark Minnesota
Health costs as a percent of GDP 8.7% 6.2% 12.4%*
Health costs per capita $1400 $922 $2113*
Life expectancy in years (1989):
Female 80.6 77.7 80.1 **
Male 74.8 72.0 73.6**
Infant mortality rate,
deaths per thousand (1989) 5.7 7.5 7.4
* Health-care costs in Minnesota-were estimated based on data from the Families USA
Foundation, which calculated Minnesotan health-care costs at 90 percent of the
** Life expectancy was reported for Wisconsin, the Dakotas and Minnesota as a unit.
Sources: Institute for the Future; OECD Health Data File, 1991.
Table 3. Bad Health Behaviors
Meat Butter Alcohol Tobacco
Average Per Capita (Animal Calories!Day) (Ki1os!ycar) (Li ters!year) (Grams!Year)
Sweden 1336 5.5 6.4 1293.6
Denmark 1628 10.9 11.8 1318.3
U nited States 1263 1.2 10.3 1507.6*
*U.S, Department of Agriculture estimate.
Source: DECD Health Data File, 1991.
Table 4. Population and Health-Outcome Measures, 1988. .
Infant Perinatal Life Expectancy Life Expectancy at i>
Mortality, Mortality, at Birth (Years) Age 80 (Years) Percent of .::;
Live Births Deaths Per Population Dependency
Country Per 1000 1000' Male Female Male Female Over Age 64 Ratio b .,
Australia 8.7 10.7 73.1 79.5 6.7 8.4 10.9% 71.6 ~
Austria 8.1 7.4 72.0 78.6 6.3 7.4 14.9 66.0
Canada 7.2 7.6 73.0c 79.7 c 6.9 c 8.9 c Il.l 65.2
Denmark 7.5 8.7 71.8 77.7 6.4 8.2 15.4 67.0
France 7.7 9.2 72.3 80.6 6.8 8.6 13.6 71.7
Germany 7.6 6.5 71.8 78.4 6.l 7.6 15.4 57.9
d d d d
Italy 9.3 12.3 72.7 79.4 d
6.2 7.7 13.6 65.8d
Japan 4.8 6.2 75.5 81.3 6.9 8.4 11.2 63.7
c d d
Spain 8.1 1O.6 73.2 79.8 6.7' 7.7' 13.1 74.2
Sweden 5.8 6.8 74.2 80.0 6.3 8.1 17.8 73.1
United Kingdom 9.0 9.1 72.4 78.1 6.4 8.1 15.6 72.0
United States 10.0 9.7 71.5 78.3 6.9 8.7 12.3 70.3
• Includes live births and late fetal deaths.
b Dependency ratio = sum of population younger than 20 and older than 64, divided by population 20-64, and multiplied by 100.
Sources: G.J. Schieber, J.P. Poullier and L.M. Greenwald, "Health Care Systems in Twenty-Four Countries," Health Affairs, Fall
1991; OECD Health Data File, 1991.
_ _ _ • ____ ,.e' __ • _ _ _ _ _ _ _ _ _ ,_, . ._ . _ _ 0 _ _ _ _ " __
Table 5. Availability, Use and Expenditures for Acute-Care Hospitals, 1988. til
Beds Per Average
1000 Red Days Admission Length of Occupancy Per Per
Country Population Per Capita Rate' Stay (Days) Rate Capita Per Day Admission
Australia 5.4 1.3 21.2% 6.1 c 67.7%C $ 418 $ 322 $1972
Austria 6.4 2.4 20.6% 11.4 81.3%
Canada 4.5 1.3 13.3% 8.9 80.3% 592 455 4444
Denmark 4.8 1.4 20.2% 6.9 80.5% 388 277 1921
France 5.4 1.5 20.1% 7.3 76.4% 515 343 2562
Germany 7.4 2.3 18.7% 12.7 85.5%
Netherlands 4.5 1.2 10.4% 11.9 74.0% 335 279 3221
Norway 4.5 1.3 14.9% 8.5 77.4% 440 338 2953
Spain 3.4 0.9 9.2% 10.0 73.4% 223 242 2372
Sweden 4.1 1.2 16.8% 7.1 c 78.4% ..,
Switzerland 6.6 1.3 13.8% 13.7 80.7% 398 210 2884 '"
United Kingdom 2.8 0.9 12.9% 7.8 76.4% .,
3.8 0.9 12.8% 7.2 65.5% 715 779 5609 ='
GECD Average 5.1 1.5 16.3% 9.2 77.7% 422 341 2912
• Percentage of total population. trl
b In U.S. dollars, gross domestic product purchasing power parities. /")
Sources: G.1. Schieber, J.P. Poullier and L.M. Greenwald, "Health Care Systems in Twenty-Four Countries," Health Affairs, Fall 1991; GECD ...
Health Data File, 1991. .,
Table 6. Per Capita HealLh Spending in U.S. Dollars ~
Nominal Ratio* Real Ratio** is"
Count!)' 1970 1975 1980 1985 1989 1990 (90/70) (90/70) .::;
Australia $176 $321 $528 $846 $1032 $1151 6.54 1.10
Austria 149 336 618 821 1093 1192 8.00 2.99 'C
Canada 274 478 806 1315 1683 1795 6.55 1.82
Denmark 209 335 571 770 912 963 4.61 1.03
France 192 365 656 991 1274 1379 7.18 1.50
Gennany 199 422 749 1046 1232 1287 6.47 2.91
Italy 147 270 541 761 1050 1113 7.57 0.70
Japan 126 252 515 785 1035 1113 8.83 3.55
Spain 82 186 322 437 644 730 8.90 0.89
Sweden 274 475 864 1187 1361 1421 5.19 0.98
United Kingdom 146 272 454 658 836 909 6.23 0.91
United Slates 346 592 1059 1700 2354 2566 7.42 2.31
* Nominal ratio is calculated by dividing 1990 figure by 1970 figure, and therefore is not adjusted for inflation.
** Real ratio is adjusted for inflation using GDP price index (1985=100) from the OECD Health Data File.
Sources: GJ. Schieber, P.P. Poullier and L.M. Greenwald, "Health Care Systems in Twenty-Four Countries," Health Affairs,
Fall 1991; OECD Health Data File, 1991.
152 The Southern Business & Economic Journal
Table 7. Total Health Expenditures as a Percentage of Gross Domestic Product.
Country 1970 1975 1980 1985 1989 1990
Australia 4.9% 5.5% 6.5% 7.0% 7.0% 7.5%
Austria 5.4 7.3 7.9 7.6 8.2 8.4
Canada 7.1 7.2 7.4 8.5 8.7 9.0
Denmark 6.1 6.5 6.8 6.3 6.3 6.2
France 5.8 7.0 7.6 8.5 8.7 8.9
Germany 5.9 8.2 8.5 8.6 8.2 8.1
Italy 5.2 6.1 6.8 7.0 7.6 7.6
Japan 4.4 5.5 6.4 6.5 6.7 6.5
Spain 3.7 4.8 5.6 5.7 6.3 6.6
Sweden 7.2 7.9 9.5 9.3 8.8 8.7
United Kingdom 4.5 5.5 5.8 6.0 5.8 6.1
United States 7.4 8.4 9.3 10.6 11.8 12.4
Sources: GJ. Schieber and J.P. Poullier, "International Health Spending: Issues and
Trends," H~alth Affairs, Spring 1991; OECD Health Data File, 1991.
fascinating things, including all the most common names for babies born in the state of
Alabama. Montgomery is in the south-central part of the state. The population of
Montgomery County at 209,000 is a liule over five percent of the total population of the
state of Alabama. The white population is about 119,000; the black and other population
about 89,000. That breaks down, I think, to about 57% white and 43% black and other.
Looking at natality statistics for the county, the total live births for 1990 were about
3800, of which 706 were teenage mmhers, and 1632 were unmarried mothers. The county
has low-weight-birth problems and high infant mortality.
Of the unmarried mothers, 155 were white and 1477 were black and other. Of the
low-weight babies we had in our system, 91 were white and 255 were black and other.
Of the teenage mothers, 154 were white and 552 were black and other.
The causes of death in Montgomery are preUy consistent with national figures. The
number one cause is heart disease, number two is cancer, number three is strokes, and
fourth is accidenlS. One of the big causes that sticks out, homicide, is much lower in
Montgomery County. There were 36 in 1990: six were white and thirty were non-white.
And these trends have continued, basicall y, in 1991 and on into 1992.
This information is provided by way of background, to give an idea of what the
health-care spectrum looks like in Montgomery County. Who pays for our health care
Bentley/January 1993 153
in this area? In the ca<;e of Baptist Medical Center, about 35% of our business is
Medicare; 15%, Blue Cross; 15%, Medicaid; 20% commercial insurance, and 8% self-pay.
Our deductions from revenue at Baptist Medical Center are 50%, which means that
we only expect to collect about fifty cents on every dollar we charge.
Another way to look at that is if we knew our payers would pay us 100% of what we
charge, we could collect the same amount of revenue by cutting our charges in half. That
may sound unusual, but that's where we shift the costs over onto the payers so that we
can provide the care for oUI share of those 37 million uninsured patients who do get
medical care. The only problem with it is that they get their medical care through the
emergency room. They get the kind of care that is required in a crisis as opposed to the
kind of care that would prevent a lot of the problems experienced by that particular
The real challenge is to look at the cost of health care and try to determine why those
costs continue to rise as they do and why health care in the U.S. and Alabama costs more
than in other industrialized countries-without any real advantages in health care. In
other words, why do we spend more and not get more, and what rqles do hospitals play
in that scenario? '
In the November 5th issue of Hospital Magazine, which is one of our trade
publications, the following news item appeared: "Outlays for new medical technology
were the major contributing factor for hospitals' rising costs during the 1980s, according
to a GAO report. A GAO official wrote in a letter accompanying the report that the
payment policies that allowed the cost of technologies to be passed on to third-party
payers reinforce the 'medical arms race'." This report was requested by Representative
Bill Archer (R., Texas).
In the same issue were quotes from other people that are knowledgeable in health
care. John Haddock, who is the Vice President and General Manager of Marketing and
Engineering at GE Medical says that n ... criticisms that there's duplicative and misused
technology is overstated by a considerable degree." He maintains that 40% to 50% of the
rise in health-care costs is due to price increases, only 20% due to technology.
J. Mark Adams, who is the Group Vice President of 3M's Medical Products Group,
believes that over-utilization of technology is the problem. He says there are four primary
reasons for this. The first is defensive medicine. The second, a third-party insurance
system that insulates the patient from the actual cost of care. Third, a value system that
places an exalted premium on human life. And fourth, the American desire for the very
best so that we can live the longest.
Christine Grant, the Director of Public Policy for Merck and Company, warns that
society risks doing great harm to patient care if it further slows regulatory review and
reimbursement approvals, or reduces the financial incentives that fuel continued research
and development in new technology including pharmaceuticals.
What would happen if we destroyed the incentive for research and development?
That's a very valid concern. There is no simple answer to this question about why health
care cosL<; are going up as rapidly as they are. Most believe that technology is a part of
the reason for increasing costs. And yet there are few people who would propose that the
154 The Southern Business & Economic Journal
R&D budget be cut. After all, it may be you, me or one of our loved ones that's the next
one to need some new emerging technology. Yet we all feel that some equilibrium has
to be reached because the market, quite possibly, is going to be able to produce new
developments that we can't afford to purchase.
Our hospital here in Montgomery is going to effectively compete with other large
hospitals in the city if we're going to survive. That's just a fact of life. I don't know of
any hospital that's ever set an objective that they were going to become obsolete
technologically. All hospitals have tried to keep up with the trends in what is being
developed in the United States in medicine so that patients who come there and physicians
who practice there can provide state-of-the-art care.
If the system of payments and other incentives are changed, perhaps a new way of
looking at technology acquisition can be developed as well. That's probably a part of the
challenge facing the new administration.
Another area we should examine is the utilization of care. As long as we pay for
health care in discreet increments, or almost like piecework, it's going to be true that
we're going to use up more of it than we can pay for. And the more we use, the more
it's going to cost.
Dr. Philip Caper, an internist and medical policy analyst at Dartmouth Medical
School, in Consumer Report's July issue says that although the total amount of waste in
our health-care system is difficult to estimate, researchers have now examined many of
the system's components with consistent results. For a wide range of clinical procedures,
on average roughly 20% of the money we now spend could be saved with no loss of
quality. Consumer Report goes on to say that of the $817 billion projected to be spent
011 health care this year, about one-fifth, or $163 billion, goes into administrative costs.
Except for a fraction of a percent that's spent on research, the rest, roughly $650 billion,
will go for actual patient care. By Consumer Report's estimates, at least 20% of that
$650 billion, or $130 billion, will be spent on procedures and services clearly unnecessary.
I can't certify that these percentages are absolutely accurate, but I can tell you that
medical care is sometimes rendered when it's unnecessary. I asked my parents once,
"Would you want heroic measures taken to extend your life if the quality of that life was
unacceptable to you?" Their answer was no. Almost all older people with whom I've
raised this question answered the same way. They've worked hard all their lives. They
don't want the financial resources that they've accumulated spent on one last blast of
high-tech, high-cost health care to prolong an unsatisfying existence for a few more days
or weeks. And yet, I see example after example in our hospital and in others that I know
about where large amounts of resources are expended in the last days of life. Can we not
come to terms with a peaceful, natural death, where a patient's comfort and dignity is the
Taking a look at the other end of life, we have the problem of low-birth-weight babies
and the teenage mothers. These statistics turn into real dollars in the neonatal nursery and
enlarge expenditures for sick mothers who don't receive appropriate care during
pregnancy. Baptist Medical Center has had a neonatal ICU since 1976 serving central and
south Alabama. After watching the patient flow for that unit for sixteen years, I can tell
you without a doubt that more dollars spent on prevention would result in less dollars
spent trying to correct problems that could have been avoided.
Bentley/January 1993 155
The Medicaid program and the state health department along with two local hospitals,
ours being one of them, started to work on a prenatal-care and education program that's
called Gift-of-Life. This program offers prenatal, natal, and postnatal care to mothers who
qualify. It is staffed by contract physicians, nurses, and midwives. Gift-of-Life, which
has operated since 1988, appears to have had a positive effect on our community. But
it may be time to take prevention hack another step. Recent studies show that we spend
much more in dollars on perinatal services than we do on encouraging responsible
parenting. I remember the 19-year-old mother who recently delivered her third child,
having ingested cocaine within two hours before presenting to our hospital. The baby was
badly addicted and had to spend many weeks in the neonatal intensive-care unit at a very
Another case was the 22-year-old woman with AIDS who just delivered her second
baby that will likely be HIV positive; or the profoundly retarded child who was deaf and
blind as a result of a kick to his mother's abdomen during the pregnancy. This baby
spent over a year in our neonatal intensive-care unit and had almost zero chance for any
hope for long-term development.
Emily Freidman regularly writes on ethical and political issues. In the most recent
issue of Healthcare Forum, where Ms. Freidman is a regular columnist, she writes on
"The Littlest Victims." In this article she states that as for public policy, we are alJ guilty
of abuse and neglect of children. There is blood on all our hands for we have tolerated
and even supported policies that terrorize, maim, and kill children-and we have done so
She lists five reasons why this is so. And under her reasoning on family planning she
The issue of abortion rights, with all its complications and delicacies, has been
dragged into the political arena, and it will not escape the spotlight any time
soon. Too often lost in the debate is the fact that the easiest way to avoid
abortion is to avoid unwanted pregnancy.
To me there is an absolute moral obligation on the part of those who would ban
abortion to prevent unwanted pregnancy and to protect every unwanted child who is born.
We do neither. We squabble about providing family planning information to teenagers.
We fight over providing condoms, despite the skyrocketing number of pediatric and
teenaged AIDS patienl~. We deny decent levels of federal funding for counseling kids
about sexual choices. We teach abstinence to hormone-ravaged young people. We
pretend that teenaged homosexuals don't exist. And if an unwanted child is born who
happens to have deficiencies of one sort or another, we don't want that child, either, and
we leave him or her to grow up in an institution.
And so the abortion battle goes on, moving farther and farther away from any
pretense of interest in what happens to children, especially pregnant children and their
offspring. Yet we know that being born unwanted, or being born to one too young, marks
a child as a candidate for abuse.
Couldn't we take prevention back another step and develop some innovative programs
to encourage responsible parenting? Recently on national public radio, I heard a reporter
156 The Southern Business & Economic .Journal
in California talking about a young mother who found herself with three small children
and no means to support them. She was on public welfare and seemed likely to raise her
children with them following in her footsteps. The report went on to say that a study of
teen mothers on welfare in a control group shows that the hope for college education was
the single greatest deterrent for young women to avoid pregnancy. We could provide a
lot of college scholarships for the cost of neonatal intensive care.
The last area I want to touch on today is a movement that's springing up all over the
country to seek out and adopt "best practice" models. It's well understood that there are
significant variations in medical practice from one region of our country to another.
These variations result in big dollars spent for care without any measurable improvements
and outcomes. Commonly cited are examples of Caesarean sections, hysterectomies, back
surgery, usually laminectomies. The best practice strategy or benchmark is really a
spinoff of the quality movement which is sweeping U.S. industry, including health care.
We could save significant dollars by determining who is getting the best outcome for the
least dollars and imitate those prices.
HCFA is launching an effort in this direction with their new HCQ2 demonstration
project. HCQ2 stands for Health Care Quality Improvement Initiative. One part of this
initiative will reflect comparative data on three common heart procedures: *cute MI,
coronary artery bypass grafts, and PCPA, balloon angioplasty procedure. nce best
practices are defined, this information will be shared with all Medicare provider to move
medical practice towards higher quality and more cost-effective care.
Needless to say, if physicians are to reduce consumption services treating patients, it
would be critical that some sort of mini-tort reform be passed to create a favorable
malpractice climate. Doctors will be much more likely to order less if the current
malpractice sword that hangs over their head is no longer there.
I would like to conclude by saying the hospital administrators I know are all prelly
much agreed that something is going to have to give in our present system. We can't
sustain indefinitely the increase in health-care expenditures we have experienced,
particularly since we apparently aren't buying beller health with those increased dollars.
Let's hope that those who have the power to drive this change use it wisely.
Moore/January 1993 157
MEDICAID IN ALABAMA: PROBLEMS AND
Brian W. Moore·
I've been asked to lalk with you about problems and prospects facing the Medicaid
program in Alabama. Afler working with Medicaid for almost seven years, if only three
and-a-half monlhs as Commissioner, I can tell you there are always both. That is,
problems we have to deal with right now and into the future as well as prospects for
Thanks to good leadership over the last few years, Alabama has a strong Medicaid
program, one that is just as good or better than any other Medicaid program in the nation.
We are a leader in many ways, especially in bringing down our infant mortality rale,
finding new and innovative ways to serve children and pregnant women, finding new
ways to fund lhe program in the face of rising costs, and developing new technologies lhat
enable us to operate a more efficient and effective program.
The Medicaid program is still growing, and has been for several years, largely
because of federal mandates that have expanded eligibility La more children and pregnant
women. In fiscal year 1992, lhere were more than 550,000 Alabamians eligible for
Medicaid at some point during lhe year. In fiscal year 1991, there were a little more than
480,000 people eligible-an increase, in just one year, of about 70,000 people. A high
percentage of those eligible for Medicaid actually use their benefits, about 85%. The
numbers will continue to go up because we are serving older children every year.
Costs are also going up. Our budget this year is $1.6 billion. In 1988, the year when
expansions began, the budget was less than $500 million. Cost is the biggest single
problem facing Medicaid in Alabama. Roughly, the slate receives a Lhree-to-one federal
match. The stale'S share in Alabama comes from three sources: the general fund, taxes
on heallh-care providers, and transfers from public hospitals and other stale agencies.
Taxes and transfers from nursing homes, hospitals and pharmacies account for more than
half of our stale funding-$241 million this year.
Despite new sources of funding, that is, the taxes and transfers from providers, we
are facing a shortfall this year. Proration and increases in expenditures are taking their
toll on the Medicaid budget. We are investing a great deal of time dealing wiLh the
We are also looking toward next year and will be one of the first agencies to meet
with the Legis1aLive Fiscal Committee in December to present and explain our request for
fiscal year 1994. I hope we will not have to cut programs either this year or next year,
bUlthaL outlook remains a real possibility.
'Commissioner, Alabama Medicaid Agency.
158 The Southern Business & Economic Journal
Though there are cerLainly other problems, that is the major one we face right now.
On a more positive note, I think we can work those problems out. Also, there are many
bright prospects for the immediate future. Next week, Medicaid will undergo a huge
change that has been planned for at least two years. For most recipients, we will no
longer issue the monthly paper Medicaid cards. Instead, recipients will have permanent
plastic cards, the same size as a credit card, that they can use as long as they are eligible
The change will bring us into 21 st-century technology as far as health-care providers
are concerned. Providers will have several new ways of checking the person's eligibility
for Medicaid and obtaining other useful information. Providers can also file claims
Alabama is one of the first slates to introduce this new technology into the operation
of the Medicaid program. At the same time, we are saving money, as much as a million
dollars over three years in printing and mailing costs.
We also have new initiatives in other areas. Recently, we announced the award of
a federal grant to set up a one-stop shopping project in Dallas and Wilcox Counties. This
will benefit about 1000 families in the first year. People who need assistance can go to
one place and be directed and helped through the application process for many different
services, such as Medicaid, Aid to Families with Dependent Children, food stamps, the
W]C program and others. Transportation and child care will be available.
This program could truly revolutionize the way people move through the complex
system of applying for the services they need. Obstacles will be removed; fragmentation
and confusion will be eliminated. Public Health is a co-sponsor of this project, and many
other agencies are involved as well.
Just a word about the future on the national front. With a new president and a new
Congress, we can expect to see changes in health care. We do not know what those
changes will be or when they will occur. Everyone in this room has heard the President
elect talk in general terms about the need for health-care reform. ]n particular, the focus
~eems to be on assuring coverage for the 35 to 40 million Americans who have no health
But a concrete plan has not been outlined, and we have no specifics. We do not
know what the new system will look like or how it will be financed. We are watching
and waiting with great interest, and we will do everything possible to make certain
Alabama has a voice in the process that is about to take place. Most people believe there
will have to be a period of consensus-building before we see a plan put forth. Of course,
any health-care reform will have to be approved by Congress, and there is certain to be
much compromise and give-and-take throughout the process. There arc many plans
already on the tablc. We can expect others to be added.
These are just a few of the problems and prospects that arc occupying my time.
There are others, but] think this is a good place to stop and see whether any of you might
have questions or comments. Thank you.
Rosenbaum/January 1993 159
THE ECONOMIC OUTLOOK FOR 1993
Mary s. Rosenbaum·
The economic outlook of the United Stales was prelly grim for a fairly long time in
the early 1990s. And much of our judgment about economic performance over that time
reflects the very rapid growth of the 1980s that became the basis for judging the economy.
It's a bit of a surprise to me that anyone wants to hear about the outlook anymore because
it hasn't changed very much. It still compares badly to the 1980s, but is a genuine
improvement from 1991 and 1992. When you consider the economic outlook for 1993-94
and beyond, you have to recognize many of the elements that are critical to understanding
general economics and the overall economic condition of the country, these elements are
critical to understanding how we got where we are and where we're going. Those same
elements are impacting health care in the United States. Although I will focus on the
U.S., I'm going to try to synthesize some of those common elements and point out where
they correspond and where they conflict.
Right now it's impossible to understand recent economic history and to make a
forecast without acknowledging the enormous impact of demographics. When we talk
about the baby b~om, we can see how it impacted almost every aspect of life in the
post-World War II era. We can see how it impacted education, healLh care, entertainment,
and the law. We can see it in almost every aspect of our lives. When I was in graduate
school taking demography, one of my professors said the baby boom role in the
population profile was like a pig moving through a python. The python swallows the pig
whole, and as it moves you see this big lump moving through the snake at different stages
of digestion. Although unflattering, it's an interesting analogy.
The economic outlook right now has a lot to do with the age distribution of the
United States. People tend to spend money on different things at different Limes of their
lives. They tend to spend money more and save less at different times. That is, there is
a life-cycle pattern to spending. This is extremely important to understanding what people
are spending on now and why they are not spending very much. For example, why there
will be no housing boom and why auto sales will not reach past peaks for many years.
Understanding the importance of demographics to the economic outlook can educate us
as to the real bounds on what policy can achieve. Policy can't undo demographics.
Demographics are having an impact on the economic outlook that people don't like, but
there's not a whole lot we can do about it.
We also need to step back in time a bit. Understanding some of what happened in
the late 1980s is extremely important in making sense of what is happening today. In late
1989, the economy had been growing fairly rapidly for over six years. The un
employment rate had been declining steadily, and was down to about 5.2%, about the
·Vice President and Senior Economist, Research Department, Federal Reserve Bank
160 The Southern Business & Economic Journal
functional full employment level. This means that most of the unemployment that was
left was either of a type that didn't respond to overall economic conditions or was simply
With the low unemployment rate, we had inOation that was beginning to rise a bit.
There was also a tremendous amount of indebtedness and leverage that had been built up
during the 1980s. Economists saw that some adjustments in those imbalances in debt, in
real estate and in housing in general, was inevitable. But the timing was very
problematic. We thought if we were good enough policymakers that we could work off
imbalances gradually without causing a recession. This would have been a first, but we
were ambitious. We called this process of slowing down gradually without having a
recession a "soft landing." Some people date the soft landing to July 19, 1989. Some
people think we actually achieved it. Some people think we were in the process of
getting there. It is an academic question now about whether or not we did get there. But
if we did, we weren't there for very long.
In August of 1990 while the economy was being slowed down, during that time of
adjustment which had only just begun, we had a huge shock to the economy when Iraq
invaded Kuwait. Oil prices more than doubled very quickly. We had a tremendous
amount of disruption on the political and emotional front as troops were called up. It
looked like war. No one knew the scope, how long it would last, how much it would
cost, and how far it would spread. That had a big impact on how much people were
willing to spend. People became very uneasy about prospects-not only about their own
financial prospects, but about the future overall. But we had a very short war. It was
over pretty quickly. Its cost, although enormous, was much lower than had been
estimated. And oil prices fell before the fighting stopped, back to where they had been,
and actually fell lower than before the summer of 1990.
Thus, we had this big shock, but it was brief. It worked itself off. Incomes began
to return to where they had been; employment began to rise again. Consumer confidence
went up again after having taken quite a hit. So, why couldn't we hold onto those gains?
Why didn't that brief rebound stick with us? Why was there no real recovery? Some
people are very skeptical that the one we have now can be sustained or whether we even
From late 1990 until mid-1992, monetary policy was eased fairly aggressively in a
number of steps. And short-term interest rates are down about five hundred basis points,
about five whole percentage points below where they were when the shock occurred.
One way of looking at why we haven't been able to sustain the economic increases,
or the kick, is that the shock of the oil prices and war may have, in fact, precipitated or
accelerated an adjustment involving deleveraging, or the paying off of debt. This shock
didn't cause the problems; the problems already existed. But they still remained to be
worked off when the war was over.
We're still going through what was started before the war. In sum, what we had was
a long slowdown that was interrupted by this war shock. In that perspective we can see
that there was really no reason to expect a nice little recovery and a very neat business
cycle profile like we have had in the past. If you look at graphs that show business
cycles, you see overall growth on a nice gentle trend upward. Our business cycles tend
to go down sharply, and then go up sharply. But what we had in 1990 and 1991, and
Rosenbaum/January 1993 161
really into 1992, was more spoon shaped. We didn't slow down very fast and we
certainly haven't recovered very fast. It was only in the third quarter of 1992 that we
reached the level of overall income in the United States that we had at the time of the
invasion of Kuwait. Even though we have been in recovery for over a year, the rate at
which we have been recovering has been very, very slow.
The blame for that goes to a number of things. First of all, overbuilding in
commercial and residential real estate markets, particularly in New England and
California. In the southeast there was some overbuilding, but not nearly the magnitude
as in those areas. There are multiple causes for that overbuilding that have to do with
restructuring, changes in tax laws and demographic changes. In the I970s and 1980s, the
housing market was supported by the fact that we had many people form initial
households, people who left school and got their first home, first apartment, first condo.
They were a large impetus. Thus, the rate of increase in housing demand was very
strong. And as that section of the population aged, and the baby-bust population came
to the point in life where they looked for homes away from parents, the demand was
much smaller. The rate of growth of housing needed to decelerate. In the meantime,
there was a large excess inventory of mostly multifamily, but also single-family, units that
needed to be worked off. But housing inventories work off a lot more slowly than
inventories of canned goods. Essentially, the housing market bottomed out.
The demographic changes that caused that big imbalance are still at work. We are
never going to have the rate of growth in this market that we enjoyed in the 1970s and
1980s. This same demographic impact is having a similar impact on consumer durables
like automobiles, washing machines, and televisions. One statistic that we have, the
driving-age population, has a rate of growth that's very highly correlated with the demand
for cars. The rate of growth of the driving-age population has LOpped out. We would
expect that the increase in demand for cars is going to be smaller and smaller for several
years. The adjustment for capacity to produce cars, especially: domestically, has taken a
long time. It has been extraordinarily painful and disruptive. This is not the result of bad
policy or bad planning, it's a demographic change.
Now, the fact is that we did see this coming. These demographic patterns don't
happen overnight. If you are in the automobile industry, you know the population of 16
year olds and 18-year olds. It wasn't caused by bad policy. Essentially, we have
overcapacity in production of not only housing, but also automobiles.
Another imbalance is the overleveraging of corporations and households. The
percentage of after-tax income that corporations are using to pay down debt and the
percentage of after-tax income that households are using to pay down debt, rose in the
1970s and I980s. However, the growth of overall indebtedness as a percentage of
income, by itself, doesn't explain the business cycle. Debt-to-income ratios have been
rising steadily since the turning of the century.
But, both households and corporations have paid back a tremendous amount of that
debt, starting around 1989, so the adjustment process was already underway before the
recession began. A lot of that involved the pay-down of principal. Certainly in the last
year and a half, it's been a<;sociated with declines in market interest rates. Much of
household debt and almost all of corporate debt is fixed to short-term market interest
rates. As those have declined, debt payments (relative to income and cash flow) have also
162 The Southern Business & Economic .Journal
gone down. So, we've got imbalances: indebtedness and overbuilding; they are
extremely broad-based, inescapable. However, I would claim that for each of these the
worsl has passed.
Overbuilding is past even in New England; possibly not yet in California, but almost.
We've deleveraged a lot, paid down a lot of debt. And we have absorbed, or are in the
process of absorbing, the huge inventory of buildings that we have.
Among new elements holding down the economy are defense cutbacks. The United
States, in the last forty-five years, devoted a fairly substantial amount of national
resources to national defense. It's very hard to argue that for the most part it was
excessive or that the investment was misplaced. Since we are all still standing here you
might even argue lhal it was well spent. We can look at the Soviet Union and sec that
lhe level of resources that they commilted was much grealer than ours. Even from their
poinl of view, it may not have seemed excessive. The type of disruption going on in the
economy in the former Soviet Union is also going on in the United States on a smaller
scale, but il is just as disruptive.
Resources devoled to defense industries are being rechanneled into other areas where
lhey will be more productive. But during the transition, there is a loss of value, a lot of
disruplion. There is personal displacement and displacement of capital. There are
winners and losers. In the long run, if we can put more of our resources inlo nondefense
industries for things that actually increase or contribule lO lhe qualily of life, we will be
beller off. BUl during lhe transilion, we will have a 10l of pain and a 10l of disruplion.
And thal will be a drag on the economy during lhe resl of this decade, unless we have
anolher scare in lhe Middle East.
What is the impact on the oUllook? Working off lhese imbalances, we began and
have had this catharsis. We have worked off invenlories, paid off debt. We're ready to
be rewarded. BUl, al lhe end of lhis recession, we slill had a lremendous nalional
indebtedness. We didn'l have any kick from the fiscal side, no impelus al all from lhe
federal governmenl in lerms of purchases lhal were focused on bringing us OUl of lhe
cycle. We were wilhoullhal addilional demand. Moreover, we have conlinued lO have
job losses in many induslries as they raised productivilY and cUl the work force.
So, is it surprising thallhe rale of recovery is excrucialingly slow? Given lhe nature
of lhe adjustmenl lhal we have had, many people are skeplical aboul whether or nol lhis
is aClually a recovery. BUl il is a recovery; il is sustainable; and il is likely lo conlinue
at this fairly slow rale. Al lhis poinl, we may be poised lo begin some modesl
Let me slep back. All of this assumes no fiscal policy initialives from Presidenl
Clinlon, which is not a very reasonable assumplion. So, lhis baseline is without fiscal
The economy has moved forward in a very lentative fashion in the lasl year and a
half. There is some queslion now aboul ils momenlum, given thal employment growth
has been very, very slow. The profile for lhe nexl two years is for lhe slow working off
of the remaining imbalances discussed. This adjustment process is very long, and doesn't
allow for much acceleration without some type of outside impetus or outside impulse.
The main impetus that we see is from low interesl rates. On the international scene, we
Rosenbaum/January 1993 163
slowed down before our trading partners did. Thcy helped keep our economy going, but
are no longer in a position to do so. They are slowing down. In many their policy stance
is still quite restrictive. So, do not expect a big push from them.
Over the next two years, overall economic growth in Gross Domestic Product (GOP),
which we used to call Gross National Product (GNP), is going to be between 2.5% and
3.0%, which is enough to slowly reduce the rate of unemployment. Any further impetus
from monetary policy probably couldn't accelerate growth much. Short-term rates will
be very, very low. The likely impact of another fifty basis points off the low end is prelly
marginal. What we're going to see is fairly slow growth in consumption expenditures.
Of course, consumers spend about two-thirds of GOP, so that's the single most important
component. The gains are going to be small because of the baby boomers' changed
consumption performance. They are not consuming as much; they are saving more.
When the baby boomers spend more, overall spending goes up a lot. And when they save
more, overall spending is a lot weaker. That is going to hold back spending on housing,
Investment is likely to be strong for equipment, especially technology. Investment
in plant, especially for nonresidential construction, retail and commercial, will be very,
very slow. Investment in factories is likely to be moderately strong, especially with the
level of pollution-abatement investment being undertaken in the United States. That's
actually going to be helping the economy in the next three or four years, with the
implementation of the new air standards.
As far as governmenL expenditures go, direcL purchases are falling because of defcnse
cutbacks. But if we anticipate that there is going to be some type of fiscal impetus, we'll
have a change in the policy mix to impact spending indirecLly. Instead of government
buying goods and services, it would focus on things like grants in aid to state and local
The scope for economic policy in the United States is a lot bigger than I think people
tend to realize. We have a very large budgct deficit. Our economy was growing vcry
rapidly in the 1980s. Our budget deficit wa" growing, as well. This is not a pallern
experienced in the pa"t. The problem we faced in thc 1980s, and, I think, in the decade
that follows, is that we did not have the wherewithal to cut the deficit. Unfortunately, that
means we have very litLle latitude to increase it when we're not growing at all or when
we're growing LOO slowly. So, we have painted ourselves into a comer where we believe
economic policy can do nothing, or fiscal policy can do nothing, because we are afraid
to exercise it. That's extremely unfortunate. There is a huge role to be played in
economic growth by the government. Whether or not that means directed expenditures
or whether it means creating an environment where there is an incentive to behave in a
certain way, that is, to save more or invest more, the impact that the government can have
on economic well-being is profound. You don't have to think that the government
necessarily has a role in the economy or should have a role in the economy, to recognize
that economic policy definitcly has a place in economic planning. Unfortunately, because
of our defIcit problem, we have restricted ourselves to a debate that leaves us very little
flexibility because we always say we can' Ldo anything about the deficit.
So, what can we do? The only thing we can do is lower interest rates, but that is a
very weak link and it is foolish for us to restrict ourselves to thinking only about that.
I'm not saying changes in interest rates can't be powerful and can't be implemented very
164 The Southern Business & Economic Journal
quickly. But in general, we need to think about a full complement of our economic tools.
I think we've gotten close to the end of our rope as far as lowering short-term interest
rates, and we need to reconsider all the options that we have. And there is a large menu
of options in the economic policy constellation.
Book Reviews/January 1993 165
The Economics of Banking. Liquidity, and Money
By Peter M. Garber and Steve R: Weisbrod. Lexington, Massachusetts: D.C. Heath and
Company, 1992, pp. 650.
Garber and Weisbrod's money-and-banking text contains twenty-one chapters divided into
six sections. The introductory chapter provides a good overall discussion of the
relevance of a financial system in understanding trade. Specifically, Garber and Weisbrod
immediately introduce the importance of financial innovations in response to the increased
globalization of trading patterns between countries.
Chapters Two through Six cover financial instruments and markets. Chapter Two defines
capital markets. The authors immediately bring the principal-agent problem and leveraged
buyouts to the attention of the reader. These concepts are often relegated to the last few
chapters of most money-and-banking texts. Chapter Three overviews the demand for
liquid assets along with the concepts of portfolio diversification of risk. Along with the
discussion of liquid assets, Garber and Weisbrod address the decline in the banking
sector's share of consumer assets. Chapter Four proceeds with describing the importance
of life insurance companies and pension funds as financial intermediaries. The
determination of interest rates is covered in Chapter Five, followed by institutional
coverage of security markets in Chapter Six. I found the positioning of Chapter
Five, following a chapter describing the banking industry and insurance companies, and
preceding one that explains the institutional aspects of the securities' markets, awkward.
Section Two is comprised of Chapters Seven through Nine. Chapter Seven produces the
typical discussion of the classification of monetary aggregates along with a review of the
determinants of the demand for money. Chapter Eight debates the pros and cons of a fiat
monetary standard. Unlike other money-and-banking texts, Garber and Weisbrod provide
a detailed discussion of alternative monetary standards. Chapter Nine rounds out this
section with coverage of the Federal Reserve System and the multiple-deposit expansion
Section Three describes, in detail, the operation of banks and the banking system. A
comparison of the balance sheets of banks and thrifts is made in Chapter Ten. Given the
recent concerns of the savings and loan crisis, Garber and Weisbrod enable the readers
to identify the regulatory pressures faced by savings and loans. Chapters Eleven and
Twelve discuss the payment systems with respect to consumers and the banking system.
These two chapters produce a more detailed discussion than most other texts. Chapter
Thirteen finishes this section by setting forth the banks' need for liquidity through the
federal funds market
Section Four discusses the role of banks with respect to the U.S. economy. In Chapter
Fourteen, the importance of bank lending and the business cycle is addressed. A
comparison between U.S. and Japanese banks' lending practices is presented as well.
Chapter Fifteen explains the Eurodollar market and its emerging role in globalization.
166 The Southern Business & Economic Journal
Exchange rate determination is described in Chapter Sixteen. In particular, Garber and
Weisbrod produce a timely discussion of the European Monetary System and target zones
for exchange rate movements.
Section Five outlines the various financial innovations. Chapter Seventeen explains
options, interest rate swaps, currency swaps and hedging. Chapter Eighteen elaborates on
why and how the liquidity crisis in banking has emerged in the decade of the eighties.
Section Six continues the discussion of the preceding section by discussing the regulatory
environment of the banking system. Chapter Nineteen incorporates previous discussions
on bank holding companies as a means to circumvent banking regulations. This chapter
ends with proposals for reforming the banking system. Chapter Twenty then addresses
the moral hazard problems associated with the banks and savings and loans. This chapter
is very well done, and is pertinent to understanding the need for reform. Finally, Chapter
Twenty-one presents the Keynesian IS-LM model of income determination along with
brief discussions of monetarist and New Classical perspectives.
Overall, Garber and Weisbrod's text provides a valuable service to those of us teaching
money and banking. Unlike many money-and-banking texts, Garber and Weisbrod
present the institutional dynamics of the banking industry whereas many other texts
concentrate on the monetary aspects of macroeconomics. I would recommend this text
to those interested in providing students with an exposure to the "nuts and bolts" of how
our banking system operates.
James E. Payne
Department of Econom ics
Eastern Kentucky University
Cotton & Capital: Boston Businessmen and Antislavery Reform, /854-/868
By Richard H. Abbott. Amherst: University of Massachusetts Press, 1991, pp. 294.
Abbotttclls a fascinating story of an ideological movement based on "white self-interest,
not morally-based humanitarianism." The movement, which was centered in Boston, was
held together by direct or indirect interest in the cotton textile business and saw itself as
a righteous counterbalance to the "slave power" of the South. This group of Boston
business leaders had a hand in just about every major event, including the wars in Kansas,
John Brown's activities, the founding of the Republican Party, the emancipation of slaves,
recruiting blacks into the Union Army, and Reconstruction. The book is an important
contribution to our understanding of 19th century America and a must-read for anyone
who refers to the Civil War as the "War of Yankee Aggression."
Important to understanding the motives of this small group of businessmen is their
ideology; a set of convictions that would make a permanent mark on American society.
Puritan society had grown into a very successful economy centered in Boston, the most
industrialized part of the earth outside of England. The Puritan beliefs in hard work,
Book Reviews/January 1993 167
personal restraint, and public service all combined to form a doctrine that called for the
perfection of secular society through policies such as abolitionism, public schools, and
temperance reform. The Unitarian-dominated Harvard College was an important link
among this Boston elite and a source of scholars and ministers who provided intellectual
and moral support for their agenda. Yale University subsequently trained a large number
, of ministers and missionary types who spread the New England vision of society both
south and west.
The group believed in free labor unencumbered by any governmental restraints, but
advocated government policies that served the interesL<; of big business. The author
clearly realizes that the Boston elite and their Whig Party "were willing to use the state
when it proved necessary. Practical, not moral, considerations would guide their actions,"
but practical economic considerations and moral concerns were mutually reinforcing.
This proved to be an influential ideological weapon, more powerful than the openly
moralizing tactics of the abolitionists. Blacks should be freed not because it was morally
correct, but because it would result in more cotton at a lower price.
The central plot of the book opens with Senator Stephen Douglas opening a can of wonns
by destroying the Compromise of 1850 with the Kansas-Nebraska Act. The Puritan elite
responded by forming the New England Emigrant Aid Company to stuff the statehood
ballot box against slavery in Kansas. It was during this pre-war period that the "sensible"
businessmen of Boston adopted the radical "higher law" position of the abolitionists that
they had formerly rejected. Guns were sent to Kansas, John Brown was funded, and the
destruction of Southern institutions became their objective.
According to Abbott (p. 49):
During the next decade and a half, these Bostoners [sic] would continue and
expand their crusade against Southern institutions. Ultimately, they would
advocate not only the abolition of slavery but the granting of equal rights to the
fonner slaves. And, in reaching such radical ground, they were led by the same
mixture of philanthropic and practical motivations, and the same commitment to
New England ways, that had marked their participation in the New England
Emigrant Aid Society.
Abbott goes on to describe the remarkable impact that this group played in the major
events before, during, and after the Civil War. For example, they provided funds for
John Brown's legal defense after his raid of the arsenal at Harper's Ferry (Brown planned
to arm the slaves). They watched his trial "with a great deal of interest," with one
prominent member of the elite noting that Brown "played his part bTfandly, though the plot
(was) a poor one." Notable among their Civil War activities was the development of an
sophisticated pro-Lincoln propaganda network.
It would be nice to credit this group for its role in the emancipation of slavery, but
Abbott's portrayal precludes such laurels. The group did not initially support
emancipation and saw blacks "as producers of cotton rather than as people with the right
to determine their own economic destiny. At no time were they ready to leave the
freedmen to their own devices, because they feared that if they did blacks would refuse
to grow cotton." Their "primary concern with cotton production in the South clearly
revealed the limits of (their) concern for the welfare of blacks."
168 The Southern Business & Economic Journal
The New England Emigrant Aid Company, the umbrella organization of this Boston elite,
expired in 1907, but not before it and related organizations played an instrumental part
in American history. The public school and temperance movements that they helped start
play an increasingly troublesome role in our society. This reviewer is forced to conclude
that those who succeed in business are not by virtue of that success capable of
Department of Economics and the Ludwig von Mises Institute