The Public Policy Institute

Managing With Care

Section 4

Public Policies For Better Health Care

If the big problems facing health care today are the high cost and the high number of uninsured, what are the solutions?

Government can't be the primary answer, in extending health coverage to more New Yorkers. That would mean more taxes at a time when state leaders are working hard to reduce our high taxes, and health care is the area where our existing expenditures are already most out of line with competing states.

That leaves private insurance—which brings us back to the issues of high costs, and making health coverage more affordable. Fundamentally, there are two approaches to controlling health-care costs, while promoting quality care, over the long term.

We could try to have the government legislate and regulate the prices of an overnight stay in the hospital, a visit to the doctor and other services—as well as the relationships between providers, and between them and patients. Supporters of this approach tend to believe that government should require all employers to provide health coverage. That was the approach in President Clinton's ill-fated 1993 proposal which failed to win support from Congress even with his own party in control. Arguments for the plan's defeat centered around the bureaucratic controls considered necessary to make the plan affordable. Many observers believed those controls would backfire, and result in higher costs.

Here in New York, more than a decade of experience proved that government-imposed controls on hospital prices did, indeed, drive up costs. For much of the 1980s and the first half of the 1990s, New York had the most cost controls, but its costs were among the highest in the country. In 1996, Republicans and Democrats joined together to reject the command-and-control method of cost limitations, repealing the state's antiquated system of hospital price-setting from Albany.

State leaders in New York have also explicitly considered the government-mandated model of universal health coverage, and ruled it out. In 1989, the state Health Department drew up a proposal for universal coverage including an employer mandate. Then-Governor Mario M. Cuomo, one of the nation's most eloquent voices on the benefits of activist government, refused to advance the proposal.

Still, the political debate these days often appears to be based on an assumption that, if government passes enough laws and imposes enough regulations on managed care, it can just ignore the fundamental reality that health care costs money—along with the obvious corollary that there are limits to how much health care we can buy.

Last year's decision by New York State leaders to force chiropractic coverage into every group health plan—whether enrollees wanted it or not—is only one example.

The 1997 session in Albany also produced legislation mandating that any health insurance policy with prescription coverage include coverage for medically necessary enteral formulas—a nutrient used in treating certain diseases—and for foods modified to be low in protein for medical reasons. Legislative sponsors said the cost of such coverage (and therefore the possible affect on employers' and individuals' ability to pay for health insurance) was "unknown."

Other bills introduced in New York's Senate and/or Assembly last year, that were not enacted, would add mandates for coverage such as:

The cost of such mandates falls especially hard on small businesses that struggle to provide health coverage to workers. Every new mandate means higher costs—and, almost by definition, more employers rendered unable to provide any health coverage at all.

As mentioned earlier, New York's leaders are also being pressured to impose other cost-inflating measures on health-care organizations, such as opening them to broad new areas of liability lawsuits. And we're not alone. Nationwide, the 50 states passed a record 182 laws affecting managed care in 1997, up from 100 in 1996, according to U.S. News & World Report.(1) In California alone, legislators approved 80 separate bills; a number of those are expected to be signed into law.

Other major action last year came in Connecticut, where the General Assembly approved legislation that would let the state overturn health insurers' decisions as to whether a given treatment is covered by a health plan. In a comment typical of the wishful thinking exhibited by many critics of managed care, the sponsor of the bill said: "This takes the cost factor out of the decision-making."

As with anything involving cost, of course, the legislation most certainly does not eliminate costs—it will actually increase them, and simply move them elsewhere. The price of health insurance will rise as a result. That means employers who already provide coverage—and individuals who purchase it for themselves and their families—will pay more. It also means, inevitably, that more employers will be forced to decide not to offer health coverage. Thus the cost will also be borne by working families who otherwise might have health insurance, and now will not. Most likely, they will be employees with relatively low-skill jobs and relatively low earnings. Neither the legislative sponsors nor the press accounts of the bill's passage bothered to mention them.

Aside from the cost issue, attacks on managed care often seem based on comparison to a perfect system of health coverage that existed, mythically, at some time in the past.

"Doctors now glorify the good old days when physicians ordered anything they pleased and patients were always totally happy," William Roper, a former head of the federal Health Care Financing Administration and now dean of public health at the University of North Carolina, told U.S. News. "There never was any such time."

Critics of managed care generally acknowledge that total government control of the health-care sector is not a good idea at the state level (even if they believe in nationalized health care imposed by the federal government). All we need, they say, is more regulation by Albany in this nook and that cranny of our health-care system.

But New York already is at the top of the list when it comes to regulating health care, and managed care in particular, as the table on the following page—based on research by MONEY magazine—illustrates.

One could argue whether the five state mandates counted by MONEY help consumers or may hurt them. Ignored, to start with, is the question of how higher costs created by such mandates hurt the uninsured and those who do have insurance but pay more for it. Beyond that, one of the supposed consumer "protections" is allowing direct access to specialists. But in many cases that can be bad for consumers—a specialist has an incentive to tell patients they need his services, while the primary care physician does not. As noted earlier, more treatment isn't always good for the patient, and may even be the source of new problems.

Regardless of such questions, the MONEY table makes clear what everyone familiar with health-care policy knows: managed care in New York State is already regulated quite heavily. And the criteria listed in the table do not include community rating, another mandate in force in New York but not in many other states.

Selected HMO Regulations Imposed, By State
Rank State Number Rank State Number
1 California 5 23 Nebraska 2
1 Colorado 5 23 Nevada 2
1 Georgia 5 23 North Carolina 2
1 Maryland 5 23 Ohio 2
1 NEW YORK 5 23 Oklahoma 2
6 Arkansas 4 23 Oregon 2
6 Florida 4 23 South Carolina 2
6 Maine 4 23 South Dakota 2
6 Pennsylvania 4 23 Washington 2
6 Texas 4 23 Wisconsin 2
6 Virginia 4 23 Wyoming 2
12 Alabama 3 37 Alaska 1
12 Delaware 3 37 Arizona 1
12 Illinois 3 37 Massachusetts 1
12 Indiana 3 37 Mississippi 1
12 Kansas 3 37 Missouri 1
12 Louisiana 3 37 Montana 1
12 Minnesota 3 37 New Hampshire 1
12 Rhode Island 3 37 New Mexico 1
12 Utah 3 37 North Dakota 1
12 Vermont 3 37 Tennessee 1
12 West Virginia 3 47 Hawaii 0
23 Connecticut 2 47 Idaho 0
23 Iowa 2 47 Kentucky 0
23 Michigan 2 47 New Jersey 0
Money magazine (December 1996) checked state mandates of direct access to specialists, prohibition on "gag" rules, payment for emergency care that was unneeded, stricter grievance procedures and required "quality controls." Number reflects how many of the five mandates are imposed in each state.

Will New York drive the cost still higher?

Fortunately, in New York State over the past two years a new era of paying for health care has begun. In 1996, Governor Pataki and the Legislature enacted historic new rules for hospital financing—eliminating much of the state bureaucracy's control over the way hospital rates are set, and allowing the marketplace to bring new discipline to the process.

In 1997, the Governor and the Legislature took another step to get rid of needless costs, freezing for one year a hospital surcharge that paid for "excess" malpractice insurance for doctors. That program continues for another year, but will be funded by existing resources built up over more than a decade of surcharges. Savings to employers and others who pay hospital bills are around $170 million a year.

On the other hand, the 1997 legislative session in Albany also proved that New York has not completely left behind the old mindset that government regulation is the presumed guarantor of health care. A new mandate on group health insurance plans requires provision of unlimited visits to chiropractors as of the year 2000. For now, such plans must cover at least 15 visits a year—and coverage for chiropractic cannot be limited even that much if other types of coverage are not so restricted.

The new chiropractic mandate will cost an estimated $200 million a year. And that cost will fall mostly on small and medium-sized businesses. As mentioned earlier, large employers that self-fund their employee health coverage are exempt from such state mandates, under federal law.

How many employers who otherwise might offer health benefits will not, because of the additional cost now imposed by Albany? How many individuals who will not have health insurance as a result of that cost will go without a visit to the doctor, or some other treatment, because they have no insurance? While it seems safe to say that there will be some of both, hard numbers are impossible to come by. Neither the chiropractors who lobbied intensely for the bill, nor the sponsors of the new mandate, even attempted to answer such questions.

Other, potentially more costly, "reform" proposals are under active consideration in the Legislature.

Lawyers want more lawsuits

One bill, strongly pushed by the state's trial lawyers, would open vast new avenues for lawsuits against health-maintenance organizations, health insurers and self-insured employers.(2) The bill would dramatically expand the liability of those organizations for "any personal injury, death or damages" caused by the health- care plan's delay, failure or refusal to approve, provide, arrange for or pay for any health-care service in a timely manner.

In other words, a trial lawyer, on behalf of a client, would be able to collect from a health-care plan even if the plan's denial of a request for approval or payment was a rational decision based on ample and convincing medical evidence, and thus was not negligent in any way. Fear of malpractice-type lawsuits would force health-care organizations to authorize nearly all procedures, including unnecessary ones that would at best drive up costs and—at worst—be dangerous for patients.

A study by the Barents Group, a Washington-based health economics firm, found such legislation would increase costs for health plans at least 4 to 5 percent, and perhaps as much as 12 percent in some cases. Such an increase in premiums would almost certainly add tens of thousands of New Yorkers to the ranks of the uninsured.

The same proposed legislation would prohibit health-care plans from giving providers incentives to promote high-quality, cost-efficient care. In other words, yet another government mandate against steps that help contain health-care costs.

When Governor Pataki and the Legislature enacted the nation's most ambitious "Bill of Rights" for managed-care clients in 1996, they considered a provision that would have required insurers to submit contested decisions about coverage to an outside party. That provision was rejected, and for good reason—a statutory mandate would drive up costs and create yet another layer of bureaucracy. The proposal is resurfacing at the federal level, where an advisory group recommended the idea to President Clinton.

External review is often a good idea, and virtually all managed-care plans are adopting it as a matter of policy for complicated medical cases. It's important that such reviews not be performed for every minor complaint, though—that would simply take resources away from direct patient care. And such review must be done in ways that make sense in the context of all the changes constantly taking place in modern health care. That means health-care plans must be left with the flexibility to design external review in ways appropriate to their own circumstances.

These and other health-coverage mandates are always described as efforts to give consumers more "choice" in the types of coverage they can receive. In fact, of course, they are precisely the opposite. Mandates force all purchasers of health insurance to buy coverage they may not want or need—and they drive up costs, depriving many of the ability to choose any health coverage at all. In effect, they substitute governmental decision-making for choices that would otherwise be made by employers and individuals.

One of the newest mandate proposals is a demand for "equity" in coverage of mental health. Supporters say, for instance, that plans should not be allowed to pay half the cost of behavioral health treatments—those for mental health, alcohol and substance abuse services—if they pay a higher percentage for general medical care. Again, the issues are higher cost for all insurance payors, and the lack of choice for all.

Just as with state-imposed mandates on local governments and their taxpayers, mandates on health coverage are politically popular because they allow elected legislators to "give" a benefit to one group while spreading the cost over the population at large. From a political vantage point, that's a no-brainer. If the Legislature is going to continue proposing new mandates on health coverage, though, at least such proposals should honestly state the cost side of the equation. Each piece of legislation that would create a new mandate should state what costs would be created, who would pay those costs, and the likely impact on the number of uninsured New Yorkers.

Beyond taking away consumer choice, and raising costs for everyone, such meddling has a far worse effect: It distracts attention from the very serious, very real steps public policy makers should be focusing on.

What are those steps? Let's recall what we really want from our health-care system—better health—and the obstacles we face—the cost of health care, and the resulting problem of the uninsured.

We need to cut the cost of coverage

State leaders have begun in the last two years to attack the central problem of health care, its high cost. But much more can—and must—be done.

Cutting the "tort tax" that drives up medical costs (along with costs in every other industry) would be a good place to start. Total liability costs in New York added up to $14.3 billion in 1996—$787 per person. More than $822 million of that represented the cost of insuring against medical malpractice claims, which rose 30 percent in number from 1991 through 1996. Trial lawyers are seeking to drive up costs additional hundreds of millions of dollars through lawsuits for "wrongful death" bereavement, and for other new lawsuits.

Instead of creating more lawsuits, New York should consider ways to reduce the number of such suits. That's especially important given that, in cases of real malpractice or other liability, as much as one-third of the typical settlement is pocketed by plaintiff's lawyers in contingency fees.

"Today's tort regime generates grossly inflated health-care costs," two experts, Jeffrey O'Connell and Michael Horowitz, wrote in a 1993 article for The Washington Post. They called for reforms including elimination of pain-and-suffering payments in exchange for defendants' early, unconditional offers to pay all other unmet losses.(3)

Scholars sponsored by the Manhattan Institute have developed somewhat similar proposals to create incentives for early settlement in medical and other tort cases—and, thus, early recovery by plaintiffs.(4)

New York State still spends too much on educating doctors who move out of state upon entering practice, or stay here and practice in specialties where more physicians are not needed. Representing about 7 percent of the nation's population, New York's taxpayers and privately insured subsidize training for 15 percent of the nation's doctors—half of whom leave the state after their residency program. Under the Health Care Reform Act of 1996, New Yorkers will pay—through their tax dollars, and through private health insurance premiums—at least $1.3 billion annually to subsidize graduate medical education from 1997 through 1999. That's a reduction from $1.7 billion a year under the previous system, but still far more than subsidies offered by any other state. About $544 million comes from private insurance payors through a "temporary" tax called the "covered lives assessment" (businesses call it the "GME tax").

The existing system of graduate medical education must be considered by the Legislature again in 1999. It's not too early for policy makers to consider steps that would reduce the cost of such education—including getting rid of the GME tax—while maintaining New York's truly vital network of medical schools.

For years, Albany has imposed costly taxes on hospitals and nursing homes to get a double shot of extra revenue. Each dollar raised from such taxes could be claimed as state support for health care, thereby justifying additional reimbursement from Washington for the Medicaid program. The 1997-98 budget included legislation eliminating those extra taxes, but not until the year 2001. This year's budget accelerated that reform. Again, further tax reductions could help.

There are other important steps Governor Pataki and the Legislature can take to improve New York's health-care system. Broadly speaking, perhaps the most important is this:

Acknowledge that the private insurance market is the key player in making health coverage—and its promise of better health—available to New Yorkers.

Such recognition should inform all of Albany's policies affecting health insurance. And it should lead to a stated policy of doing what is necessary to expand private health coverage—by employers and by individuals.

State leaders might decide, for instance, that an ambitious but reasonable goal would be to expand the number of privately insured New Yorkers by 1 million within the next three years.

With hundreds of millions of dollars in new federal aid available for children's health insurance, Governor Pataki has proposed steps that could cover an additional 420,000 children—every New Yorker under the age of 18—by 1999. That's a worthwhile goal.

Child Health Plus provides free or low-cost health insurance to children not eligible for Medicaid in low-income families. Under the Governor's new proposal, insurance would be free for children in families earning up to 160 percent of the poverty line. So, for instance, a family of four with annual income of $25,615 or less could receive coverage while paying no premiums. Above that level, families could purchase coverage by paying $9 a child each month, to a maximum of $36. Even middle-class families earning, say, more than $35,000 a year for a family of four could join the program by paying the premium on their own, at a cost of $900 a year per child. That's not a small amount—but for many families it would be well worth the cost.

But the great bulk of our uninsured problem must be solved with private-sector solutions. New York is different from most of the rest of the country in the makeup of our uninsured population. This state has traditionally been far more generous in providing taxpayer-funded insurance, whether through the nation's largest Medicaid program or through other efforts such as Child Health Plus. Where we fall behind is in employer-sponsored coverage. While 56.5 percent of all Americans receive coverage through their or a family member's employer, only 52.7 percent of New Yorkers are in that category. And fewer than 1 percent of New Yorkers carry individual coverage, while that figure nationwide is nearly 5 percent. Those few percentage points translate into hundreds of thousands of individual residents of the Empire State; their lack of insurance coverage is the hidden price we pay for our above-average cost of health care.

Clearly, what Albany should do first is to make it easier for employers to provide health coverage, and for individuals to purchase it on their own. That means, first and foremost, reducing the cost. Getting rid of the excess costs now built into the system (such as those taxpayer dollars that educate too many doctors) is part of that step; others include innovations such as allowing a "foundation" health plan that would provide basic health care at a significantly lower price.

The state directly subsidizes health insurance for some small businesses, through the Health Insurance Partnership Program. The program will pay up to 45 percent of health-care premiums for certain businesses that employ 50 or fewer and have not provided health benefits to any employee in the past year. The program is also available to sole proprietors who do not have health insurance. HIPP is based on the idea that private-employer coverage is key. Still, it is at bottom a government program. State officials should consider ways to help businesses whose employees benefit from the program transition fully into the private marketplace for health coverage.

Let's get real

Health-care providers and other advocacy groups, the news media, elected officials and New Yorkers in general must take a realistic look at our health-care system.

Never before have we asked so much. We expect doctors and other professionals to breathe life into tiny babies who, years ago, would have died while still in the womb. We want cures available to all for the most common diseases, such as breast cancer, as well as the most rare. We even expect the system to convince us to do what we've always known we should do, but have refused—such as exercising and eating more vegetables.

What's truly amazing is that, more and more often, our health-care system does those things. A key reason for that success is managed care—its ability to allocate resources where they are most effective, at the same time it promotes comprehensive, high-quality health care.

That's why managed care is so valuable—indeed, essential to our health-care system. And that means it's essential to our very health.

1. "Are HMOs the right prescription?", U.S. News & World Report, October 13, 1997; p. 60.

2. For marketing purposes, trial lawyers and their supporters ignore the legislation's impact on other types of health coverage. They've labeled this legislation the "HMO liability" bill—realizing that any attack on HMOs is seen as virtuous these days. It applies, however, to any form of health-care coverage.

3. "The Lawyer Will See You Now: Health Reform's Tort Crisis," The Washington Post, June 13, 1993; p. C-3.

4. See 'An Accident And A Dream,' The Public Policy Institute, March 1998.

contents introduction section 1 section 2 section 3 section 4 appendix

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