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A Dirty Little Secret: Managed Care Is Bad For Business


Economic Viewpoint

A DIRTY LITTLE SECRET: MANAGED CARE IS BAD FOR BUSINESS

After remaining surprisingly level since 1993, business health-insurance premiums are rising again. The 1999 rate increases are coming at between 5% and 25%, with smaller businesses hit the hardest. What happened?

First, the easy gains of managed care have been realized, and these cost savings were evidently a one-time break. After you have cut hospital days to the lowest level in the industrial world, there remain some conditions that just don't lend themselves to outpatient care. Cancer, heart disease, AIDS, stroke, and the other killers remain expensive to treat no matter how astutely you manage care.

Managed care has already cut psychiatric benefits to the point where a patient virtually needs to be violent, suicidal, or homicidal to be hospitalized. The talking cure has been replaced by pills, but the pills aren't cheap. HMOs have cut access to other specialists to the bone. Yet managed care or no, sick people still need doctors.WONDER DRUGS. In addition, the two underlying drivers of medical inflation show no signs of abating: an aging population and new technology. People keep living longer, and oldsters incur rising medical costs. Science keeps inventing marvels, whether elaborate surgical techniques, sophisticated new medical devices, or wonder drugs.

Some of these, such as less-invasive diagnostic procedures and surgeries, sometimes save money on a procedure-by-procedure basis. But with more people getting more procedures, the net effect of new technology is to add costs. As recently as the 1950s, the treatment for something as serious as a heart attack was bed rest, painkillers, and maybe anticoagulants. Today, cardiologists have an entire arsenal at their disposal--surgical, pharmaceutical, and high-tech. All of this costs money, and with over 70% of Americans getting insurance from employers, business ends up bearing most of the expense.

The fastest-growing source of medical inflation is drug prices. The legendary profitability of the biotech and pharmaceutical industry is rooted in ever more pricey drugs. Insurance plans are limiting what they'll pay for such expensive and arguably "recreational" new drugs as Pfizer Inc.'s Viagra. But for every elective drug for complaints like lackluster sex or baldness, dozens of new drugs address such unimpeachably clinical conditions as cancer, heart disease, and AIDS. Even if insurers won't pay to enhance your sex life, new life-saving drugs will continue to raise insurance costs.

The U.S. is in many respects more vulnerable to health-care inflation than those countries with universal health coverage. It relies more on market competition than Europe or Japan. But in the case of health care, paradoxically, market forces may add to the inflation more than they restrain it.

We have layers of middlemen marketing insurance products, engaging in medical underwriting, targeting low-risk populations, second-guessing doctors, promoting mergers and acquisitions, and, of course, pursuing profits. We have duplicative, proprietary systems of record-keeping and treatment protocols that ought to be public goods. The U.S. system, uniquely, is ratcheting down actual care in the name of cost containment, while its health entrepreneurs add layers of cost.

The lack of a universal health system also means we pay the world's highest pharmaceutical prices. Other nations use their national health services to negotiate steep discounts. America pays retail. U.S. businesses, consumers, and taxpayers, in effect, subsidize the cheaper drug prices overseas. The drug industry remains fiercely opposed to the inclusion of drug benefits under Medicare for fear it would cut prices and profit margins. With less than one-fourth of the elderly having drug coverage, millions who could benefit from the new miracle drugs aren't getting them.

The consumer backlash against the pinch of managed care and consumer fears of lost insurance through job changes bring voter demands for regulation. The insurance industry can't block such legislation entirely but is powerful enough to render it toothless. So much of the ensuing "consumer regulation" doesn't help consumers but is pure paperwork and cost. Little of this operates in universal systems.

On balance, our fiercely entrepreneurial health industrial complex--drug companies, insurers, for-profit HMOs, hospital chains, consultants, risk-selecters, management practice companies, etc.--is actually raising premium costs for business. When will business at last wake up, break the odd link between employment and health coverage, and support universal health insurance? BY ROBERT KUTTNER


Silicon Valley State of Mind
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