Sick Around the World

Uwe Reinhardt & Tsung-Mei Cheng

photo of Reinhardt and Cheng

Husband-and-wife health policy experts Reinhardt and Cheng (who is referred to as May Reinhardt at times in this interview) are based at Princeton University, where he is the James Madison Professor of Political Economy and she is a co-founder of the annual Princeton Conference on health policy. Here they discuss the U.S. health care system's problems and analyze other countries' approaches, including that of Cheng's native Taiwan, which studied health systems around the world before reforming its own. This an edited transcript of an interview conducted Nov. 10, 2007.

Professor Uwe Reinhardt, give us a précis look at the U.S. health care system. What's good and what's bad about our system?

Reinhardt: Well, if I were to do a balance sheet of the system, the good things are that we have an extremely well-trained labor force, particularly physicians; I don't think any nation trains doctors better. We have the latest technology, simply because we throw so much money [at it]. ... We are really technology-hungry in this country. That's a good thing.

More and more, our system treats patients like customers, which is actually a good thing; that it's very, in general, customer-friendly -- not always, particularly if you're poor, which is a different story, but that is, by and large, a good thing.

And it's very innovative, both in the products we use, in the techniques we use and the organizational structures we use. Those are all very good things, highly competitive.

The bad things are that our financing of health care is really a moral morass. It is a moral morass in the sense that it signals to the doctors and hospitals that human beings have different values depending on their income status. To give you a specific example, in New Jersey, the Medicaid program pays a pediatrician $30 to see a poor child on Medicaid. But the same legislators, through their commercial insurance, pay the same pediatrician $100 to $120 to see their child. ... How do physicians react to it? If you phone around practices in Princeton, Plainsboro, Hamilton -- I did this once, and I think I called 15 practices -- none of them would see Medicaid kids.

So here you have a country that often relies on these kids to fight their wars, and yet treats them as if they were lower-value human beings through the payment system. I think that is unique. No other country would make a differentiation like that. So that's a disgrace.

We have 47 million uninsured people at any moment of time, of whom possibly the richest one-third could buy insurance on their own if that market worked, if they could get insurance. But if you're an individual not employed in a large company, and you want to buy insurance and have a pre-existing condition -- so you had a skin cancer, say -- you won't get insurance, or the premiums will be sky-high. So the market for individual health insurance in America is dysfunctional; it doesn't work, and that is a major problem.

And then, of course, we have, like most nations, the problem of undocumented aliens. In Europe, they just cover them; they just simply cover them. Here, we have this debate in the [legislature]. Every so often comes the edict: Don't give them health care. But you're a doctor or a nurse in an emergency room, and here comes a mother, illegally here, with a child; the child is aching. What are you to do? The legislature tells you, "Don't treat them." ... That is disgraceful. ...

Do people die in America of diseases that medicine could cure?

Reinhardt: Absolutely. The Institute of Medicine [IOM], in a two- or three-year study funded by the Robert Wood Johnson Foundation, came out and said every year 18,000 Americans die prematurely because they didn't have health insurance and let their illnesses drag too long.

We could have cured them and saved their lives?

Reinhardt: We could have definitely done that, yes. That's what the IOM says.

Why do Americans tolerate 18,000 people dying every year [who] could be cured?

Reinhardt: Well, in part, most other nations were nations that shared a common culture and are more middle-class; the income distribution is much less wide. We have a whole new corporate aristocracy here, ... and [recently] we have increasingly legitimized the idea that this aristocracy has certain rights. For example, what always stuns me on Princeton campus is that you have young men who favor the surge [in Iraq], who say we must fight terrorists and talk about the grave danger of the terrorists, [yet] feel under no obligation to put on a uniform and lead that fight. ...

So we have a nation where the elite thinks it's OK to advocate a war and send the lower-income people to do the fighting. It's natural for such a people to think that the lower-income people should also have a worse health care experience. ... And the other countries are not there -- I always say, not there yet. I tell the Germans and the Swiss, "You're not there yet, but if you're not very, very careful, if we Americans come over there and rearrange ... your health care system, you will be just like us."

Yeah. We heard people in every country express that fear: "Oh God, we're becoming more like you, like Americans." I didn't see it.

Cheng: You're right, because yes, there is such fear, ... because in those countries, too, you have a greater divergence of the economic status. The rich are becoming richer, and the gap between the rich and the poor is getting bigger. But so far there's no evidence that their health care is becoming less equitable.

We noticed, traveling around the world, that every other country covers everybody, but they do it for a lot less money than the U.S. spends. How can the United States spend so much more than everybody else on health care?

Reinhardt: There are a number of factors. The first thing is, of course, that we are the richest in terms of GDP [gross domestic product] per capita, and there is a very close correlation between health spending per capita and GDP. ... But that equation between income and spending cannot explain that we spend ... $1,500 more [per capita] than everyone else, even if you adjust for income. And that derives from the fact that we're so specialist-focused and use so much technology that other nations are much more cautious with.

And then, secondly, our payment system is so administratively complex ... that about 24 percent of every health care dollar goes to administration. In other countries, like Canada, it would be less than half that, and in Taiwan, for example, it's much, much less. ... If we could cut administrative costs in half, we would have more than enough money to cover all the uninsured.

Is one of the factors the doctors' income?

Reinhardt: That's now the latest target, to blame it on doctors' incomes. Yes, American doctors get paid more, relative to average employees, than doctors in other nations; that is true. It's about five times average employee compensation, and in England it's about two, and in Canada it's about three. So that's certainly true.

However, I would caution, the physicians' take of the whole health care cake is 20 percent, of which close to half goes to pay for their expenses: malpractice, nurses, rent, supplies. ... If you cut physicians' income by 20 percent, which would be a huge cut, you would shave 2 percent of national health spending. It wouldn't bail you out, and you would have a huge cadre of highly demoralized doctors. So this doctor bashing, I think, is barking up the wrong tree.

How do you feel about insurance-industry bashing?

Reinhardt: Well, insurance-industry bashing, their profits are about 5 to 6 percent of the [total cost], so if you took all the profits away, that doesn't do much either. I would say, don't bash them but ask them: Be more efficient; use common claims forms; use common nomenclature. Don't offer me 30 different customized plans; just give me three or four to pick from. Simplify, simplify. Bill electronically. We are the only nation where paper is still the mainstay in the private insurance industry. ...

We went to an insurance company in Switzerland ... [and asked them,] "How long does it take you to pay a claim?" "I pay them all within five days." "How many do you turn down?" "I don't turn any down." But in America there's a whole denial industry, isn't that right?

Reinhardt: A denial industry? It takes usually, on average, 60 to 70 days for a private insurer to pay; some faster, some slower. Medicare pays within 20 days. But in other nations, say in Asia, it's even much, much faster. Canada, too, pays faster. You have a credit card, like an American Express card. The doctor puts that through a machine, puts in the codes for the services he or she rendered, and gets paid within a very short time, no questions asked. And then at the end of the year, they check whether the billing was roughly in keeping with norms, but they don't check every bill. We check every bill. It must be the Puritan streak in Americans. ...

Would you tell us about the health insurance industry term, the "medical loss ratio"?

Reinhardt: Yeah. The medical loss ratio is the insurance perspective that says, "That's the money we insurers lost to buy health care."

Anything they use actually to pay a medical bill --

Reinhardt: They call a loss. It's of course a loss to them, because it's an outflow. This is why most of them no longer use that term; it's very bad PR. They call it the "health benefit ratio." Sounds a little better. ...

And how much of the premium dollars that they take in do they actually use, paying people's medical bills?

Reinhardt: ... It varies per year for a company, and it varies across companies, but on average, I would say somewhere between 80 and 85 [percent] gets paid for health care.

See, that's striking for us, because in the other countries, the insurance companies were paying 95 to 96 percent of premium money to pay medical bills.

Reinhardt: Yes. Medicare here pays 98 cents [on the dollar] for benefits, but then people point out, quite correctly, Medicare causes the doctors and hospitals to have considerable administrative costs because of compliance. Every hospital has [an office of] a compliance vice president with 10 or so many people in it, because if you violate Medicare's almost incomprehensible rules, you can go to jail. ...

A lot of Americans say, well, the drug companies are making obscene profits. What factor is that in American cost structure?

Reinhardt: ... If you look at total drug company profits in a given year, of every retail dollar sale, drug companies who manufacture the stuff get 75 cents. And of that, they make 16, 15 percent profit. So if you multiply that out, we have about $220 billion in drug sales; that's about, say, $25 billion in profits. Now, that is a lot; you can buy two Princetons for that. However, if you then divide $25 billion through $2.2 trillion in national health spending, you get 1.2 percent; that is, drug company profits are 1.2 percent of total national health spending.

So even if they made no profit, we'd only cut 1 percent of --

Reinhardt: Cut 1 percent. So again, that's the wrong target to shoot at. What you really should ask is, for all this money we're spending, are we getting the maximum value in the drugs? And by and large, the economists who have looked at it would say yes, we actually do.

Are Americans paying more for the same drug than Canadians or Brits?

Reinhardt: Absolutely. Oh, yes, we do, sizably. I think on average, for brand-name drugs, Canadians pay 30 percent less.


Reinhardt: Their income, GDP per capita, is also 30 percent less, so one might say it's just pegged to income. There was a paper actually in Health Affairs that said ... what different nations pay for the same drug traces pretty much GDP per capita.

But why do the drug companies let Canada pay less for the same drug?

Reinhardt: Because the Canadians have a drug control board, and the government there pays for the drugs, and they're just simply saying, "We're offering you this; take it or leave it." ... Even if you get only 30 percent of what Americans pay, that's still a huge profit margin above what it really costs you to make the pill. So how can you resist a good, tender morsel like that? ... The only thing American drug companies pray for is that Canadians don't resell those drugs at a profit to Americans, and that's what that whole fight about re-importation is all about. And it's not a big deal; there isn't that much.

Medicare is a huge buyer of drugs. Could they negotiate better prices and get lower prices from American drug companies?

Reinhardt: This is what Democrats believe, that Medicare could have a pricing board and buy cheaper than what the private plans negotiate. I am a skeptic, because ... in America, you can buy the heart and soul of legislators retail, with money. So I do not believe that when the chips are down that the government would be able to get lower prices. There would be lobbying; there would be all kinds of things. ... So I think actually the deal that the Republicans made through the private plans was the better deal. ...

Insurance companies negotiate the price, but the government doesn't do it.

Reinhardt: Yes. I can't prove it. Of course we don't have the control group, the government, doing it, but my betting would be that actually the prices are as favorable as they would be if government had done it.

I'm not an economist. I'm kind of ticked off that I have to pay 30 to 40 percent more for the same pill, made in the same factory, than somebody in Ottawa. Should I be mad about that?

Reinhardt: You might say [yes], obviously. However, supposing you then passed a law that says there shall be only one price for the drugs everywhere worldwide. That can be done. The companies would figure a price at which they would maximize their profit. But then you would leave millions of human beings out, price them out of the market at that high price. ... Given you are willing to pay that high price to begin with, why not serve these other people and let our drug companies make the extra profits with which they can fund R&D?

We economists, in our classes, teach students that to some degree, price discrimination is actually a good thing; that it allows you to serve lower-income people. Take Africa, with AIDS. They could never finance what an AIDS cocktail costs here, over $10,000 a year. But if you sold it to them for $300 a year, which just barely covers cost, they could probably serve quite a few of their citizens, with World Bank help. We economists say that will be beneficial. But it's a two-tier system; yes, African people pay less than we would pay.

So you're telling me, if I have to pay $100 for a prescription, at least I can feel good that I'm subsidizing costs for some poorer person --

Reinhardt: Some poorer, even Canadians. ... What is cruel in our system is that you have uninsured gas station attendants who pay very high prices for drugs, much higher than a corporate executive pays in Canada for the same drug. And you could say that American gas station attendant could certainly be furious, and my heart is out with him. But the issue here is insurance; the issue is not so much drug pricing. ...

If you were designing a health care system, would you build one where the basic health insurance was a profit-making operation?

Reinhardt: I would certainly have a large nonprofit contingent as a benchmark and then tell the for-profits: "Look, if you can match their premiums, if you can somehow do this better, and you make a profit, you earned a profit, keep it. But you've got to compete with the nonprofits." And I would even put in a government plan to have all three compete side by side and as a benchmark. I think that's a good system, when you have them competing side by side.

So people could buy health care from Aetna or WellPoint or from Medicare?

Reinhardt: Yeah.

Wouldn't everybody buy Medicare?

Reinhardt: Not necessarily. Americans keep telling me they hate government. I always tell them: "Man, I've got a country for you: Go to Afghanistan; they don't have one." So if you're of that ilk, yes, you can have your private paradise, but if you're comfortable with government, then go with government. ...

Can you tell us what happened when the private insurance companies started selling Medicare coverage, "Medicare Advantage" I think it's called?

Reinhardt: Yes. That started under Ronald Reagan, I believe, where they could create qualified health maintenance organizations [HMOs] that could bid for government-enrolled Medicare patients. And the idea then was, we will pay you 95 percent of what we would have spent under the government program, because you claim to be more efficient; you claim to be 20 percent more efficient. You can keep the other 15.

That worked for a while, and the reason it worked, it turns out, research showed that they got mainly the healthier elderly. ... Their come-on was drugs; they covered drugs and the Medicare program did not. Now, when drug prices really went through the roof and drug spending went through the roof, the HMOs couldn't make money anymore.

And people like myself and others said: "Yeah, that seems fair. If they can match what Medicare pays now per elderly, and for that money can do a little better by offering drugs, they should compete with them." And we all endorsed this.

But then came the Medicare Modernization Act of 2003, where under the Bush administration the law was changed such that now the private health plans get, on average, 12 percent more than it would have cost to keep the same elderly in the government, traditional Medicare. So now if an elderly moves from the government program into the private, the taxpayer has to pay 12 percent more. It's a little tip that was put on top of it. For some plans, these fee-for-service plans that attract elderly in the Midwest and the rural, they get actually 20 percent more than those elderly would have cost in the government program.

One can raise issues of fairness there; that's no longer a level playing field. But this is the deal that was struck, and that is why, ... if you read Wall Street reports, the private health plans make very good profits off Medicare. This is their new growth frontier.

Because they're getting a subsidy from the federal government.

Reinhardt: They're getting a generous tip from the taxpayer.

Does this experience suggest that private health care can provide coverage cheaper than government?

Reinhardt: ... To me, I would look any private health plan in the eye and say, "Look guys, if you need 12 percent more than it costs the government to attract customers, where's the saving for me, the taxpayer?" I could fairly ask that. Now, they say, "Oh, we offer newer benefits, more benefits." But then I can say: "Hey, I could have done that. If I had spent 12 percent more on a traditional government program, they could offer more benefits, too. So when you tell me you're more efficient, you haven't proven it." ...

But Americans tend to believe the private sector is always more efficient and cheaper than big government. That's what we always say. [Does this apply] in the health market, too?

Reinhardt: Yes, Americans believe that, and particularly when you go among Republicans, even after five [beers], they still believe it. ... But I always say, "If it's really true, why would they need that 12 percent extra? ... Explain to me why something that costs more saves me money as a taxpayer." ...

This gets to a more basic question: Is health care a commodity, like toothpaste or tires?

Reinhardt: We Americans, or half of Americans, think so. Certainly the policy-making elite think it is just another commodity, a private consumption good, but an important one. And so therefore, when you're poor, we will help you, just like we help you have clothes, like we help you have food, and of course we make education that way, too. But it's a private consumption good nevertheless.

Other countries view health care as a social service that should be collectively financed and available to everyone on equal terms. My wife and I just interviewed the German minister of health, and it was an exhilarating experience, because [it was a] totally different language. It was obviously important that everyone should have the same deal in health care. That was one; she mentioned that at least five times.

And the other word she mentioned you don't hear here is "dignity." In fact, I finally interrupted her and said, "Do you notice that you have said 'dignity'" -- Wrde is the German word -- "five times?" It's a [word] that's not in the American vocabulary. Here, the president will go on TV and says: "Oh, if you're uninsured, that doesn't mean you don't get health care. Just go to the emergency room of your hospital." But you go there as a health care beggar; you don't have insurance.

And the German minister of health would say, "But that's not a dignified experience." ... And that drives their health policy, because they have 200,000 uninsured in Germany -- that's 0.2 percent of the population -- and she thought it was a huge social problem, and she solved it. And we were asking her: "Why is that a problem? We wouldn't even notice that here. We've got 47 million, or 16 percent." And she says it had to do with dignity. ...

May, can I ask you, in most countries, do they take it as a given that everyone should have a right to some basic level of health care?

Cheng: Yes, I would say so. America is the only country, ... among the developed countries, that does not have universal national health insurance.

But if you ask Americans, "Does everybody have a right to basic health care?," what do they say?

Cheng: They say yes, everybody should have health care, on the one hand. But on the other hand, if you ask them, "Are you willing to pay for it?," they say no. So I've never been able to understand this contradiction.

And that gets to your point that a country's health care system reflects its basic social values.

Reinhardt: Yes, and one must respect differences there. There are libertarian values which say private property is the overarching value, the sanctity thereof, and there are egalitarians who say health care should be shared and so on. That's fair enough. What troubles me about the American people is they talk out of two sides of their mouth. ...

If you're going to fix American health care, what do you have to do first? Do you first get universal coverage and then worry about costs? Or do you do it in the opposite order?

Cheng: ... Absolutely coverage first, providing access to all. Take Taiwan, for example. That is the route that they took. When National Health Insurance came in, in 1995, overnight they folded into the system 41 percent of the population who had no health insurance at the time. So overnight, immediately, these people had access to health care, and that saves lives. We all know that. ...

Reinhardt: ... Almost any policy wonk will now tell you, you must have universal coverage first. Then you have an even playing field, [not] one hospital saddled with a lot of uninsured, another one has few, and of course they can't compete. After you have that, you can have competition on quality, you can have competition on costs, etc. Everything hinges on there being universal coverage first. ...

... Is the quality of medical care as good in America as it is in other developed countries?

Reinhardt: The studies I have seen, done mainly by the Commonwealth Fund, where they actually look at particular procedures or particular illnesses and see how they get treated, you get a mixed [signal]. On some we are the best, and on some we are low in the ranking. But what did not come out, what I actually had hoped or thought would happen, is that we're the best in every dimension, given how much we spend. ...

Cheng: I'd like to just say this about quality of care in America. ... I think Americans should know that we spend by far the most on health care, by a long shot, compared to any other country, but in terms of the quality of care, that only 55 percent of the time do Americans receive the appropriate care. This was a finding by an award-winning study by the Rand Corporation, Beth McGlynn, published in the New England Journal of Medicine two years ago, whether this care is preventive care or acute care or chronic care, any type of care.

How would the 55 percent correct care compare to other countries?

Cheng: I don't think there are similar studies in other countries, so it's difficult to say. But I think the question for us is, we're spending on average over $7,000 per person -- including newborns and very healthy people -- a year on health care, but we're only getting the right care about half of the time. And are we getting our money's worth? ...

... Healthy life expectancy at age 60: How do Americans rank on that one?

Reinhardt: We rank slightly lower than Canadians; I do know that because I looked at it recently. Probably lower than people in Japan and Taiwan. We might rank higher than Germans on that, but I'm not sure. ... We're not shining on it; let's put it that way.

Have you seen those comparative studies on the possible number of deaths due to medical errors in surgery or diagnosis?

Reinhardt: Well, there was the Institute of Medicine book, controversial, To Err Is Human. And they estimated somewhere between 50,000 to 100,000 Americans die in hospitals prematurely from avoidable medical errors, which Lucian Leape, a physician at Harvard University, said is the equivalent of a jumbo jet crashing every second day in O'Hare. ... So yes, we have this. Then there was a study of that nature done in Australia, and they were slightly worse than we were. So I think this is a problem everywhere in the world, but it is at least on the radar screen, and I think probably will be addressed.

But there was a Commonwealth Fund study just recently that looked at reported medical errors, and there, to my surprise, Americans report more medical errors than were reported in other countries. Obviously these are always numbers you could argue about -- well, maybe we report more and they don't, if we really adjust it -- but nevertheless, that survey showed we're not shining on that. We're not the country with the least medical errors. ...

Every health care system needs some kind of quality controls on the doctors, on the hospitals, and in the American system it seems to be malpractice cases. Is that a good way to do it?

Reinhardt: At the moment that's all we have, and it is somewhat effective. If we didn't have it, we'd be in much, much worse shape. The criticism against that system is that the lawyers who bring the cases get a big cut; the contingency fee system. And a lot of people would say if we abolished this, malpractice would be cheaper. But in countries where the lawyer has to get paid to do the work, and the losing party has to pay the party that prevailed their court costs, in such a system, low-income [plaintiffs] would never bring suit; they would never have a hope. So actually, as un-American as this may sound, I'm actually in favor of the present system until we have something better. ...

What is being proposed, and has been for 20 years in this country, is a form of compulsory arbitration, where you go in two stages. Supposing a malpractice occurred, you then bring that to a board, which would be like a Federal Reserve Board, but in every state. Some compensation for work loss and some reasonable compensation for pain and suffering -- that's what that board would do.

If you're then not satisfied and wanted to sue, you could, but the board's finding would be in disclosure [at trial]. The professional decision of whether or not a physician committed malpractice would be delegated to a board only of physicians, because to say you are judged by a jury of peers when you are a thoracic surgeon, and the jury is a bunch of people like me -- economists, postal clerks, etc. -- that is not a jury of peers. They go by emotion. So therefore, the system we have is bad, but the idea that rich and poor have access to redress is good, and better than in other countries.

Does our malpractice regime add significantly to the cost of American medicine?

Reinhardt: The average cost of malpractice [insurance] premiums as a percent of national health spending is around 1 percent. The cost people attribute to the system is what is called "defensive medicine": that doctors will order tests or do procedures not because they're convinced clinically they should do it, but they always have in mind: "I'm sitting in a courtroom and they say, 'Did you do this test?,' and if not, the jury would nail me."

The AMA [American Medical Association] has estimated it could be up to 10 percent [of tests]; we don't really know what it is. I also tell doctors: "Well, on the other hand, these tests are profitable for you. So if we abolished malpractice, would you give up 10 percent of your income?" And that's not so clear to me whether they wouldn't do these tests anyhow.

We asked doctors in all these different countries: How much is your malpractice insurance? Will you ever be sued? And [they had] very low insurance rates, and no, they don't ever expect to be sued. So how do those other countries maintain quality in medical care?

Reinhardt: If you take Germany, for example, the doctors are employees of the hospital, and the whole hospital is accountable for everything that happens in its walls. With us, we have the strangest system: A hospital is a free workshop for an independent businessman or -woman called the doctor, who can go in there and order nurses and everyone around and cause costs, etc., but is actually sort of independent. The hospital isn't really accountable for the work even of the anesthesiologists and the radiologists, because they're freestanding entrepreneurs. That system is much more difficult to control, quality-wise. In the other countries, where doctors working in a hospital are employees, there is internal quality control. ...

I think there have been studies of how many Americans go bankrupt each year because of [medical costs]. How does that compare to other countries?

Reinhardt: Well, in other countries, people may go bankrupt because they got sick and they couldn't run their businesses. ... We have this, of course, in America, too, but in this country, you can go bankrupt because you have medical bills that you cannot pay. Now, the studies I have seen -- a Professor Elizabeth Warren at Harvard [Law School] does these -- unfortunately, in their sample, they didn't really pull apart how many people went bankrupt just because they got sick and had to lose work and income versus how [many went] bankrupt just over medical bills. But it does seem sizable. ...

One of the cruelties of our system is that both at the pharmacy and in the hospital, the uninsured are being charged the highest prices, the much higher prices. ... And then of course these people initially try to pay these bills, cannot, fall behind. Then it has happened ... that these people are sent to court, and the court orders [them] to make the payment. They cannot make the payment, and they get jailed. There is no other country in the OECD [Organization for Economic Cooperation and Development] where any citizen has ever been jailed for failure to pay a hospital bill, only in America. And I would ask my fellow citizens: Are you comfortable with that?

In the countries we went to, generally ... there's one health care system that treats everybody, rich and poor, from before you're born until you die. Is that how you would describe the American system?

Reinhardt: No. This is actually quite amazing. In Canada they say, "You're a human being, period; that's it." ... We distinguish between young, between working-age and old, so that's one major distinction, and then between the very poor in various shades: 130 percent of poverty, 150 of poverty, 200, all these different shades of low income. And then you have the broad middle class, and then the very, very rich. When you overlay that, it looks like a Mondrian painting.

And now for each, we have separate insurance deals, and each deal pays the hospital a different price for the same thing. People may not realize that ... when you ask a hospital, "What's the price of a coronary bypass?," they'll say, "Well, who are you? I need to know who you are and who your insurance carrier is to tell you how much that costs." And it can vary by a factor of three within the same hospital. ... Whoever has bargaining power with a hospital gets low prices, and whoever doesn't pays the highest. And that is why the uninsured are charged the highest prices.

If an economist were designing a system, would it be wise to put everybody into a single health care system, like, say, Britain's?

Reinhardt: I think that would make a lot of sense. Or you could have a system where everyone has the same standard benefit package, and then insurance companies could lay more stuff on top. ... In Germany they have 200 distinct sickness funds, but it's really one system. So you could have that. But what we have here makes absolutely no sense at all. ...

Now I'd like to talk to you, May, about the Taiwanese system. ... Why did Taiwan do this health care reform?

Cheng: Taiwan's health reform really started in the 1980s. At that time, Taiwan had had very solid economic growth for over two decades. So society is getting very prosperous, and people started to ... demand better health care. ... That's the number-one reason. And number two is that you have a leadership that is committed to bringing this about. Taiwan at the time was under the government of the Nationalist Party, the Kuomintang; many people refer to it, sometimes fondly now, that it was a benevolent dictatorship. ... So the government was really committed to doing this. ...

And then you have a third reason, which is in 1987 the government did away with the martial law, which then ushered in a period of very vibrant democracy. Suddenly you have this opposition party rising out of seemingly nowhere demanding, "Let us have a turn at the helm of the government." So the Kuomintang government was challenged by the Democratic Progressive Party.

So these three reasons really created what's called a window of opportunity. Such opportunities don't come along very easily, very often. And the government seized it and went about seeing how we can do this. ... First of all, they mobilized all the governmental departments. ... So they set [up] a planning commission, and they say, "Whatever government department was in charge of what previous insurance scheme, you all come together; let's discuss." They also looked abroad. So they sent their people overseas to study other systems.

How many different countries did they look at? Do you know?

Cheng: Over 10. Maybe 10, 13, 15 countries they looked at. So in the end, the program that they finally set up in 1995 really is like a car that was made of different parts imported from overseas, but it was basically designed and manufactured domestically. ...

The timing is interesting, because at the same time Taiwan was doing this, the United States had an effort going on.

Cheng: Yes, the Clinton health plan. That was an interesting contrast, because while Taiwan went ahead and implemented universal national health insurance, the Clinton plan, on the other side of the Pacific, fell flat on its face. It was basically dead on arrival.

... How come Taiwan could do it and we couldn't?

Cheng: I think that, again, you go back to the leadership question. Taiwan had a very, very determined leadership, and then supporting the very determined leadership, you have a cadre of highly competent, highly trained technocrats. ... They were given the opportunity to say, "Do this," and they did. Plus, at the time, because the leadership was very effective in warding off political interferences, ... so they got this thing through. But people still remember what happened to the Clinton health plan: It did not have the support of Congress, so it really just didn't go.

Does this suggest to you that the same thing would happen if another president tries to reform health care in America?

Cheng: I think it would make a huge difference, because I think leadership is one of the most important qualities or elements in any major health reform. Look at the U.K., for example. In the year 2000, Tony Blair was the prime minister, and the National Health Service in the U.K. was, by most estimates, in shambles. They were underfunded, there were long waiting lines, and they had very bad statistics in terms of cancer care, mortality, morbidity.

So Tony Blair said, "This is unacceptable to us as a nation, so let us commit to major health reform." And he did it, and he committed real resources to it. So between the year 2000 and 2008, England would have increased the resources of the National Health [Service] by a full 50 percent of what it was back in 2000. ... And so you look at today's NHS, it's much, much improved in terms of capacity. Now they're setting about doing a quality improvement, so there's movement there. But again, it's leadership.

So when we look at the system that Taiwan set up, what do you think about the result? Did they do it right?

Cheng: I would say, if you judge by what the program set out to achieve, yes, it was highly successful. The government wanted to bring health insurance to everyone, so now they have achieved that. ... They like to joke that the only one that doesn't have health insurance is the jail population in Taiwan. Yes. So from that perspective, they succeeded fabulously.

And also from the people's perspective, if you look at the satisfaction, I would say it's also very highly successful, because for years, the satisfaction has been in the 70s; it's only beginning in 2006 that satisfaction declined somewhat to the mid-60s, 65 to 66 [percent]. And that is because the program needed more money, and yet they're not getting more money, and so people are paying more in terms of registration fees and co-pays. So satisfaction suffered a little bit.

When everybody was covered, did the usage, the consumption of medical care go way up?

Cheng: That's a wonderful question. If you look at total national health spending in Taiwan in the year prior to the National Health Insurance, it was ... 4.7, 4.8 [percent]. And the year that the National Health Insurance was established, in which they folded in 41 percent of the population -- in other words, they covered 41 percent additional people with health care -- health spending went up to, I like to say, "only" 5.39 percent.

Before they introduced the National Health Insurance, the average annual rate of increase every year was in the 13 percent range. ... But since then, the annual rate of increase has gone to 6 percent, and now it's around 4 to 5 percent. So from a cost-control point of view, yes, bringing about National Health Insurance marvelously controlled costs ris[ing].

Why did that happen?

Cheng: Because Taiwan went for a single-payer system, and a single-payer system is a very powerful tool to regulate costs, because the single payer -- in this case it's the government -- can set prices. The government, after negotiating with the doctors and hospitals, decides on a fee schedule that everybody abides by. Plus, they have this global budget to say, "Every year we'll spend this much on health care." ...

... How much choice is there for patients in Taiwan?

Cheng: One hundred percent. In other words, the patient can decide where he or she wants to go for care.

He can go to any clinic in the country?

Cheng: Any clinic, any hospital, including tertiary care medical centers. Now, you might say it's not efficient, and it leads sometimes to overuse, ... but the government can easily see, in any period, who is ... an above-average user, so that the government can find that patient and talk. So currently the rules are, say, if a patient goes to see a doctor or hospital over 20 times a month or 50 times in a three-month period, then the IT picks that person out, and the person then gets a visit from the government, the Bureau of National Health Insurance, and they have a little chat. And this works very well, because after this, the utilization among this particular group of people goes down an average of 35 to 60 percent. ...

... May, what lessons do you [think] America could learn from Taiwan's health care system?

Cheng: ... [A] very valuable lesson is that the effective use of information technology does wonders for a health system, whether it be from a cost perspective or a quality perspective. In Taiwan's case, first of all, people access care with a smart card. It's a credit-card-sized card. You go to a doctor or hospital, you present this card, and you're logged into the system. Then the doctors put in their provider's card, and now both the patient and provider are logged into the pairs system. ...

And this way, they can really monitor utilization. Taiwan's single-payer actually requires all the providers to submit, every 24 hours, a complete record of every piece of service delivered, ... and it can question you if it sees something untoward. ... So that's cost control. And also in terms of quality, they can see, by looking at what services are rendered for what diagnosis, whether the treatment was appropriate. ...

Most Asian countries are known to overuse antibiotics; Taiwan was one of them. ... So the single payer, the Bureau of National Health Insurance, said, "No, this is not good from both the quality and cost point of view, so let's try to reduce it." So through this utilization monitoring, they were able to get the antibiotic-use level down by an average of 20 percent across the board in a three-year period. ...

So a global budget, a single payer, and lots of different providers -- that sounds like U.S. Medicare to me.

Cheng: Yes. Medicare is a single-payer system. ... And there, the interesting thing that's worth pointing out is that in a Commonwealth [Fund] study in 2002 or '03 about satisfaction [with] different health plans that America's elderly have, Medicare was by far the most popular program. Sixty-two percent of the Medicare population surveyed say that yes, they're satisfied with that, because it gave them the security that they felt was very highly valuable.

So it's a huge leap, but is it possible to conclude from Taiwan's experience that America, which already has Medicare in place for some people, could make a Medicare kind of system for everybody?

Cheng: Ideally I would say yes, ... but what is politically feasible is quite something else, especially given the political system of the United States, where very powerful interest groups have tremendous influence on government policy. ...

Reinhardt: ... Technically you could obviously do this. The problem that I see with our political system is, how would you be able to run that, if this health system couldn't be hands-off? Because if you look at Medicare, its board of directors is the House Ways and Means Committee and the Senate Finance Committee. Now, name me a company where the board of directors can take money from suppliers. Suppose you were on a board of General Motors, and a steel company pays you a ton of money to make sure GM buys steel from them. But that's exactly how the Medicare program would work.

So I think if you had a single-payer system, you would have to really have an arm's length, the way the Germans do it, where they say, "Self-administration: The government gives the broad framework, but you people run it." ... And I point to Medicaid as an example. Here's a program that blithely pays hospitals in New Jersey 70 percent of what it costs to take care of a poor person. That is not how a single-payer system should behave, but it does. So I have some worries that maybe one ought to have a little bit more choice, even among who buys health care. ...

When we were in Taiwan, a lot of people said, "This is a pretty good system, but there's not enough money in it; it's underfunded." Does that seem legit to you?

Cheng: Yeah, I would agree with that. ... Even now, they're just spending a little bit over 6 percent GDP for health care that goes from prenatal care to bone marrow transplants. The benefits are comprehensive; it has drug benefits, vision care, traditional Chinese medicine, kidney dialysis, inpatient care, outpatient care, just about everything under the sun. And the single payer keeps adding benefits to it. This is on the one hand.

But on the other hand, you look at the revenue for the National Health Insurance. In its 12-year history, the premium rate was able to increase only once; it's a 7 percent increase, that's all. And so actually, as we speak, the government is borrowing from banks to pay what there isn't enough to pay the providers.

And politically, they couldn't raise the fee that people have to pay for this care?

Cheng: They couldn't, because everyone is concerned about courting the voters' favor. ... So it's really a problematic situation, because there are a lot of downsides to the program when it is underfunded. There's very little R&D; the budget just isn't there, and what budget there is keeps getting cut. There is no technology assessment, or very little, except for drugs, and there's just slower overall adoption of new technology. ... There's very low doctor-to-population, nurse-to-population ratios. So overall, you feel the tightness everywhere.

Reinhardt: ... When you have a single-payer system, don't abuse the privilege as a government and underfund it, because when you do that, you will ruin a good thing. You will make people eventually unhappy. The Canadians did that; they actually reduced the percent of GDP going to health care in the last decade. Canada used to be, 80 percent of the people were satisfied. It's now closer to the U.S.; still happier than we, but closer. And that was a big mistake that they made. ...

Now, if you go to other countries --

Well, let's go to Japan. Tell us about the Japanese health care system.

Reinhardt: Well, the Japanese system, ... they basically adopted the Bismarckian social insurance system, where everyone is insured. It is fairly highly regulated as to prices; even drug prices are regulated. It's relatively cheap by OECD standards; given their high income, it's a cheap system, perhaps a little bit too cheap. I think Japan still has quality problems of the sort we have that one thinks they should have been able to address earlier. But certainly on any statistic you could look at -- longevity, health status, children's care, I think even satisfaction -- the Japanese beat us in that regard. So I think it's certainly a more efficient system than ours.

Tell us about the German health system.

Reinhardt: The German health system has the oldest social insurance system, put in by ... Otto von Bismarck [German chancellor, 1871-1890], who actually put it in there mainly as a pre-emptive strike against communism and socialism. ... He saw the unions giving each other this mutual help, and he just made that legal and said, "You now have to pay into a pot, and there's going to be some laws on keeping that honest."

And it grew and grew. It was then copied by Japan. It was exported forcefully during World War II, but the countries kept it after -- Belgium, France and the other countries -- and modified it, as the Dutch now do and the French have done.

But basically these are social insurance systems, and this is ... what some politicians cannot get through their heads. They talk about socialized medicine as if, of course, it were something evil. But what these systems are, they use socialized insurance -- in other words, to socialize the financial risk of getting sick -- but the delivery system is private, often a for-profit mix.

If you want to look at a purely socialized health care, you would have to go to the United States, where we have it. In particular, that's the system we reserve for our veterans. So if I hear politicians run down socialized medicine -- and I have done that before the Congress -- I say: ... Do you hate your veterans? Why do you reserve purely socialized medicine -- there's only the U.S. and Cuba that have that -- for the veterans? ... So getting the terms right would be very, very helpful in our national conversation on health reform. England used to be a socialized system --

Tell us about the British health system.

Reinhardt: Now, the British health care system traditionally ... had been purely socialized health care, and by that we mean that the production means are owned by the government. So the government owned their hospitals and government paid for it, but the ambulatory-care physicians were freestanding doctors, essentially entrepreneurs, but they got paid a capitation [for] half, and for the rest a fee for service. But that, too, was regulated, what they got.

So it's still a highly regulated system with remnants of socialized medicine. But now Maggie Thatcher, [British prime minister, 1979-1990], I think, converted the hospitals that used to be owned by the government into essentially nonprofit community hospitals run by trusts with boards of directors. So it's quite a mixture. It's a system in transition that has invited in for-profit hospitals and clinics, has a small private sector -- but it's small; actually, it's less than 10 percent of health spending is through a purely private system. ...

Is there something in Britain Americans could learn?

Reinhardt: I think in Britain they do a lot of things -- for example, children's care. They use school nurses, and every school has a nurse. And I once met one, and I said, "What do you do?" She says, "I'm their mom, ... and [when] I see something wrong with the kid, well," she says, "I can actually take care of the referral of that child to a GP [general practitioner] or a hospital, because I know the child is insured." ... We in America don't use the school system nearly as much as we could to keep children healthy. That's what we can learn.

I think what you're getting at is a piece of the bigger thing that I saw, which is the Brits, because they have to care for you cradle to grave, they really put a lot of effort into preventive medicine.

Reinhardt: Well, here is a story ... that no one yet really has thought about. Duke University has tried a technique called prospective health maintenance, where they actually take genetic tests and try to find genetic markers. So what they're really trying to do is not treat sickness but treat the probability of getting sick sometime in the future. ...

And so you would invest and have one- and five-year health plans with each individual, where they are supposed to [maintain] body mass, blood pressure, right diet for your genetically customized condition. This would cost money up front, but it would postpone or avoid a lot of cancers and other illnesses later.

But for that to make sense, you have to have a payer, an insurance company, that benefits from investing money now so 20 years from now they don't have expenditures. The Canadian system has that; the Taiwan system has it; the U.K. system -- all of these systems benefit from investing in preventive care now for the payoff later. It's more complicated when you have an insurance system where patients, in short, stay with a carrier only for a few years.

Then the insurance company doesn't have an incentive to spend money on preventive care.

Reinhardt: They don't. In defense of the insurance industry, I would say they actually do pay for a lot of it, and we actually do give a lot of preventive care in America. But that's not the greatest economic calculus for the insurance companies. A lot of them do it because they want to do the right thing, if I may say something nice about them. ...

Let's talk about the Swiss and the change that the Swiss made in their health care system. What went on there?

Reinhardt: Well, the Swiss originally had a system where they had a lot of people without insurance, and then at some point they decided, "We need to have universal coverage, based on solidarity." And so basically they said: "We won't have a government-run insurance system. We'll have private insurance carriers, mainly nonprofit or for-profit, and they have to offer a benefit package, and on that, they cannot make any profits." But what they can do is, they can offer you premiums that vary by the deductible you're willing to bear. ... That's the consumer choice you have; it's really about the policy design of a constant benefit package.

Thereafter, the insurance carrier buys your health care for you from hospitals, doctors, drug companies, but those prices are all regulated by the government. It's not the way here, where each insurance carrier haggles with each hospital and each doctor; these are regulated prices. I wrote an article for the Journal of the American Medical Association and said the closest thing this comes to is the [1990s] Clinton plan, where you have some choice of insurance carrier, but a lot of stuff is regulated later on. So it's a heavily regulated system.

Now, what about poor people who cannot afford the premium? They get subsidies from the states, from the cantons. Now, the argument is -- and there's evidence of that -- that these subsidies aren't large enough. When you look at ... how economists measure the equity of a financing system, we have a kind of an index, but roughly speaking, it's what percent of your income goes for health care and health insurance. And the Swiss, in that regard, are more regressive than the Germans.

In Germany, your premium is a function only of your income, not even family size. ... So the German system is quite progressive, and the Swiss is more regressive than the German or the Dutch system. But it is less regressive than the United States, where here, ... for low-income people it's very high, and for high-income people, of course, it's very low. And for corporate executives it's minuscule. ...

Is there a political lesson America could learn from the Swiss reform?

Reinhardt: Well, [the lesson] from the Swiss reform is that you certainly can have a private insurance system doing the purchasing of health care and administering that, and you can have some competition. Much of it is just actually imagined. It's just like having the airlines. ... American and United are pretty much the same, and yet, as a customer, it may please me to tell one of them to go to take a walk and fly with the other, although I get the same service for the same price. Still, that choice and that competition may have some use. You can learn that.

What you could learn from the Germans, they have a very clever system where the government tells private interest groups -- the doctors, the hospitals, patients -- to sit at a table and say: "We want you, within six months, to figure out how to solve this problem. ... And if it's reasonable, we'll accept it. If not, after six months, we will tell you what you will do." ... It's just like parents telling teenagers: "You go and do what you want. As long as you're reasonable, we'll let you do it. Otherwise, we'll take care of it."

So would you say the Japanese health care system is socialized medicine?

Reinhardt: No, it's socialized insurance, and that's different. Socialized medicine means the government owns the means of production; government would own the hospitals and the clinics. ...

Is Taiwan's new system, is that socialized medicine?

Reinhardt: No, no. It's purely social insurance, but it is a completely, essentially free-enterprise delivery system.


Reinhardt: Germany, the same thing: You have totally social insurance, but the delivery -- many hospitals are for-profit medical practices; clinics, pharmacies are for-profit. It's a completely enterprise-driven delivery system.

The Swiss system?

Reinhardt: Same thing. They have reasonably well-socialized insurance, not perfect, but a completely open delivery system, but with regulated prices.

Is the British system socialized medicine?

Reinhardt: In large parts, in the hospital sector, it basically still is, although they are moving more toward a community nonprofit base. They're in transition, but it traditionally had been purely socialized medicine.

OK. And does socialized medicine exist in the United States of America?

Reinhardt: Socialized medicine exists for the veterans. That's what we have for the veterans, and of course for all military personnel. ... The [care for] U.S. military service in Iraq and in Afghanistan is purely socialized medicine. ...

We've heard some people have proposed that a solution for America is something called consumer-driven health care. How does it work? What is it?

... Well, the name "consumer-driven health care" at this time is a deceptive marketing label. What we're really talking about is an insurance policy with a very high annual deductible -- up to $10,500 per family, and less for an individual -- and then coupled with a savings account into which you can put money out of pretax income; you don't have to pay taxes on such income.

Now, this has the advantage ... that people faced with this deductible will think twice before going to the doctor for trivial issues or drugs they don't need, etc. But of course the problem also is that they may not go when they should or may skimp on the drugs they should be using, like a blood pressure drug, so that one would have to be solved by saying preventive services will have first-dollar coverage. So you could solve that problem.

But then what I argue is, yes, it may have the economic effect of cost control, because you then would have to know the prices different doctors charge, and hospitals and pharmacies, and something about the quality. And that information at this time exists only in a few areas. The insurance companies are beginning to work on Web sites that will give you that, but it's still very primitive and fairly unreliable information. So that is why I compare it really more like thrusting someone into Macy's department store blindfolded and say, "Go around; shop smartly." ...

The other problem that I see with it, though, is it has ethical dimensions to it that people don't appreciate. If I make anything tax-deductible, then a high-income person in a high tax bracket saves more than a poor [person]. So supposing a gas station attendant and I each put $2,000 into a health savings account, and we get a root canal -- about $1,000, just the drilling. It costs me about $550 because I'm in the 45 percent bracket. The gas station attendant may, in fact, not pay federal income tax because the income is so low but may only pay Social Security, so he saves 8 cents on the dollar. So a root canal will cost me $550; will cost him $920. ...

Secondly, think of a family of two professionals, each making $140,000, close to $300,000 income, and they have, say, a $5,000 deductible. Would they deny their child anything that they think the child needs over a lousy $5,000? ... But think of a waitress who makes $25,000 with a $5,000 deductible, and her kid is sick. It will certainly make her think twice. She's likely to say, "Maybe not." So therefore we're asking the lower half of the income distribution to do all the self-rationing through prices. ...

And the third issue is this deductible. If you're chronically healthy, you don't actually ever spend as much as that; you have a tax-free savings account. If you are chronically ill, on five drugs, you're going to spend that deductible year after year. So the proposal is to shift more of the financial burden of health care from the shoulders of the chronically healthy to the shoulders of the chronically sick.

And I would say, imagine a politician coming to the people with a platform that I just described in ethical terms. ... You think that would sell? So they say, "We've got to find a better name. Why don't we call it consumer-driven health care?," and have all these deceptive labels that even George Orwell wouldn't have thought of. That is what I find troublesome. Yes, it's an approach to health care, but could you please describe it to the American people honestly, in all of its dimensions -- not just economics but information and ethics? And that's not done. ...

... Do you think Americans are ready to accept a system where everybody gets some basic level of health care?

Cheng: I would not say we're there yet, but I think what's encouraging is that Americans seem to be more willing to open their eyes, open their ears, to look at and to hear about other health systems.

Reinhardt: I would say no. ... The American people are not ready for the idea that everyone has at least a moral right to good, timely health care. They do agree they have a moral right, in critical cases, to have anything done to save their life, but they don't believe that anyone has a right not to fall that sick to begin with. They don't believe, for example, that every child has a right not to get sick from asthma to the point that they have to be hospitalized. ...

So if you ask me, "Are we ever succumbing to some notions of solidarity as a nation?," I would say, "Not at all." I would describe us much more as a group of people who share a geography. That's a better description of Americans than that we're a real nation with a sense of solidarity. ...

... You've been doing it much longer than I, but I'm more optimistic than you that Americans are ready to change it. ... Seventy-nine percent say we need fundamental change.

Reinhardt: I hope so, except you're younger than me. ... We've been through this so often. And then you see [Calif. Gov. Arnold] Schwarzenegger's [plan] -- I mean, it's about as American a plan -- and they ran it down. The ultimate to me is [former Mass. Gov.] Mitt Romney putting a workable solution in place in Massachusetts and runs for president, running it down. I mean, the same guy running down his own health plan -- that kind of is discouraging.

[N.Y. Sen.] Hillary Clinton's plan, it's messy, to be sure, but it is Massachusetts writ large. Schwarzenegger, Hillary and Mitt Romney ... could [get] together and say, "We have roughly the same idea." And yet the first thing, [when] Hillary came out [with her plan was], "Socialized medicine, government takeover, Hillary-care." ... Doing that is impolite to the American voter. Instead of engaging and saying, "About the Hillary Clinton plan, this is how I understand what it does; I don't like this; I don't like this" -- like, for instance, I would say I don't like the employer mandate -- then you're talking turkey in this case. But just to say, "It's Hillary-care II; therefore I'm against it" --

I don't know if you know this story; Humphrey Taylor of Lou Harris [Interactive, a polling company,] told me it. He said, at the end of the [1994] Clinton plan, they went and did a survey and described the Clinton plan to people, and asked, "What do you think of it?" And they said, "That's a pretty good deal." Most people actually liked it. And then at the very end they said, "Oh, by the way, before I hang up, tell me this about this Clinton plan you hear about. What do you think of it?" And people said, "It's terrible." ...

And that is what happens. And I believe the question you can ask: Is it really honorable and respectful of politicians to do that to a people that deep down want to be decent and want to be sincere?

Have you seen any [2008 presidential] candidate's plan that's a good plan?

Reinhardt: Well, I think the Clinton plan is different from the plan they had before, which was actually at its core not bad, but [Clinton health care reform task force leader] Ira Magaziner loaded onto it all kinds of regulation. ... Now everyone says, "Well, she's caving in," and I would say that's unfair. ... I think she put together a plan that could definitely work; [former presidential candidate John] Edwards similarly. I mean, none of these people['s plans] are government takeovers; none of them are even single-payer plans. In all of them people have choice of insurance carrier, choice of doctor. They are honest in saying it will cost you $100 billion. I would say the rule is half a year in Iraq, that's what it will cost you to do it.

If you go and say, "Oh, we're going to let the market solve this for $40 billion," almost any policy person, right-wing or left-wing, will tell you, "Not for $40 billion." For $40 billion, you will help some people, to be sure, but you won't solve the problem. ...

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posted april 15, 2008

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