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McKinsey & Company


Can the United States Provide Health Care For All?

May 18, 2009

By Regina E. Herzlinger

Of course.

After all, providing universal coverage, at, say, an average cost of $5,000 per person, will cost at most $250 billion annually and likely less because some of the uninsured can afford to pay part of the cost of their health insurance — a quarter earn more than $40,000- and many are lower-cost young people. Two hundred and fifty billion dollars is a large sum, for sure, but not overwhelming relative to the trillions of expenditures in the stimulus bills.

And United States citizens support universal coverage. Buffeted by a recessionary economy and locked into jobs they do not want only because they offer health insurance, Americans increasingly demand affordable access to health care. So we’ve got the demand. We have an adequate supply of doctors, nurses, and facilities (though perhaps not forever if we continue on our current course). And we can afford a well-structured universal plan. To achieve such a plan, however, we need to impose the discipline of the marketplace so that patients can spend wisely, providers can price services correctly, and we can cut down on waste and inefficiency.

What are the obstacles?

US health care costs are already killing our economy. Prudent people on both the left and the right of the political spectrum worry that universal coverage that further expands these costs may be the final nail in the economy’s coffin.

At 17 percent of GDP, US costs are about 70 percent higher than those of our developed global competitors. The uniquely high proportion of health care funding funneled through employers forces US companies to carry this excess poundage into the global arena, unlike employers in countries that support expenditures through a broader tax base. Many employers, especially smaller ones, do not offer health insurance at attractive rates—a third of those who work for organizations with fewer than 25 employees are uninsured, for example. As a result, the allocation of labor in the economy is distorted by productivity-killing job lock, as employees spurn jobs in these smaller companies, which create about 80 percent of new jobs.

The experience of Massachusetts provides a sobering lesson about the results of expanding universal coverage without paying attention to cost control. As more than 300,000 people gained insurance, costs also increased. Not surprisingly, the number of enrollees who needed subsidies was higher than expected. When the recession hit once wealthy Massachusetts, the increase in health-care costs helped tip the state into a billion-dollar deficit. The Commonwealth is now contemplating cost control through all-payer regulation, in which the state effectively sets the prices for health insurance. If this Massachusetts solution seems like the road to a single-payer system, under which the state government controls all health care expenses, that’s because it is.

There is no question that single-payer systems control health care costs: Canada, in which private payment is virtually illegal, and the United Kingdom, in which most of the funding comes from the government, have substantially lower costs. But do single-payer health care systems achieve cost control in a manner that would be acceptable to the American people?

Single-payer systems control health care costs primarily by rationing services to the 20 percent of the people who account for 80 percent of the costs. The political calculus is cruel but irresistible: 80 percent of the people, the healthy ones, will love their system, while some of the sick, a mere 20 percent, will not. As a result, the United Kingdom has the lowest uptake of new cancer drugs among the Big Five European economies and commensurately low cancer survival statistics. The percentage of people treated for end-stage renal disease in the UK is roughly a third of that in the United States and about 50 percent less than it is in other Organisation for Economic Co-operation and Development (OECD) countries. Lack of treatment is essentially a death sentence because most people cannot afford to pay the high costs of treating these diseases from their own pockets.

The United States may render too much medical care to the sick but the United Kingdom does too little. The Americans who caused the managed-care backlash are unlikely to tolerate this kind of rationing.

Nevertheless, in the United States, Medicare is alleged to be a good cost controller and one that avoids the rationing tactics of the single-payer economies. So how does it achieve this miracle? Give considerable credit to government accounting: Medicare is low cost because the government accountants are permitted to ignore some inconvenient truths: $34 trillion in unfunded liabilities plus $89 billion in underpayments to medical care providers, which are ultimately paid by private insurers. With correct accounting, Medicare’s cost would increase by more than a trillion dollars. Further, if Medicare were the sole US health insurer, it would either increase its payments to providers by $89 billion or the current near-shortage in doctors would reach crisis proportions as medical students and graduates, burdened by huge debts and limited financial prospects, chose other professions.
Although the Democrats tout various other magic bullets for health care cost control—invigorated health care IT, oodles of prevention, miraculous reversions of destructive lifestyles, and centers for measuring relative cost effectiveness, even President Obama’s budget director pooh-poohed their likely impact when he headed the Congressional Budget Office. Most Americans do not believe these miracle solutions will do the job, either. In their eyes, the key to slimming the US health care system lies in eliminating its waste and inefficiencies. After a thorough analysis, McKinsey claimed that plain old inefficiency accounted for about $500 billion of excess US costs relative to other countries, as adjusted for their wealth and other relevant characteristics.

So, can we control health-care costs by slimming down this sector, without rationing care, and thus make health care available to all?

It cannot be that difficult. After all, we have achieved this kind of cure in other sectors of the economy, even for complicated products such as cars and computers. Henry Ford, for example, singlehandedly slashed the price of a car from that of a house to something readily affordable by the middle class. Bill Gates, Gordon Moore, Michael Dell, and Steve Jobs transformed the finicky, volatile $150,000 minicomputers I reluctantly programmed (in a foreign language, Fortran) as an MIT student in the 1960s to the cheap, reliable, user-friendly devices we use today. Service industries have benefitted from productivity too. Another McKinsey study attributed a third of the 1995–1999 surge in US labor productivity and continuing growth through 2002 to retail’s managerial and organizational innovations, such as the new markets created by eBay and and the inexpensive and stylish products offered by IKEA and Target.

There were two key ingredients to these productivity surges: the consumers who bought goods and services that provided better value for the money and the brilliant entrepreneurs who supplied them. The only viable health care cost cure is to reform public policy so that we create a consumer-driven health care market that motivates and rewards productive innovations in supply.

On the demand side, most health insurance beneficiaries do not behave like real consumers: employer-insured consumers are not motivated to shop carefully because they do not recognize that their health insurance benefits are essentially taken from what would otherwise be their wages, and those insured by the government have someone else footing the bill. As a result, consumers do not exercise the normal value-for-the-money judgment that has caused goods and services in other markets to become simultaneously better and cheaper.

When people use their own money to purchase health care, they drive costs down without compromising their health. For example, Switzerland, where health insurance is totally purchased by consumers (the poor and sick are subsidized), has costs that are 40 percent lower than those in the United States, as well as excellent care and universal coverage. Similarly, high-deductible health insurance policies demonstrate that middle-class consumers who pay a meaningful fraction of their health care expenditures out of pocket reduce spending without damaging their health.

On the supply side, providers are compensated for delivering fragments of care by a Medicare payment system that compensates providers for a hospital stay, for example, rather than for all the treatment and followup needed to treat a disease or disability. This payment system is especially problematic for the treatment of chronic diseases and disabilities, which account for 80 percent of health care costs. Because the providers are not motivated to optimize the overall course of care, patients receive suboptimal care that ultimately results in higher costs. The experience of Duke University Medical Center in devising an integrated system of care for the treatment of congestive heart failure is instructive. Although its integrated system reduced costs by 40 percent in only one year, Duke as an institution lost virtually all the savings it generated because it receives substantially higher compensation for treating sick, hospitalized people than for creating improvements in health that keep people out of the hospital in the first place.

Effective cost control would motivate consumers to shop carefully for insurance policies that offer the best value for the money while giving providers incentives to supply the best value for the money. There are two reforms that can make this happen:

1) Reform the income-tax system so that employed enrollees understand that their income funds the purchase of health benefits. The most direct way would be to make the money spent on health insurance available as cash, tax free, to employees. For example, my employer, Harvard University, could offer me a tax-free raise for the $15,000 of my income that it currently spends to purchase my health insurance. Like me, many of Harvard’s employees would opt to take the money and buy their own insurance, creating a genuine consumer-driven market.

2) Insurers would then compete for customers with policies that offer better value for the money. Their most important innovation would be the creation of integrated networks of producers paid for providing the total care needed by victims of chronic diseases and disabilities. (The payment reform would be led by changes in Medicare’s payment formulas.) These networks would offer better and cheaper care because of their integration. Other policies might reward health promotion by offering up to 40 percent rebates—that would amount to $6,000 annually in Massachusetts where a family policy costs $15,000—for enrollees who demonstrated health promoting behaviors, such as smoking cessation or vigorous exercise regimens.

The combination of invigorated supply and demand is the only health care reform plan that will avert the economic disaster that otherwise awaits us and, simultaneously, make health care available to all.

Sadly, it is a solution that the Washington, DC, establishment, which doubts the wisdom of consumers and the competence of entrepreneurs, is most reluctant to effect.

Original Source:



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