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Health check (Part 1): How we got to where we are now

This article first appeared in the St. Louis Beacon, Oct. 5, 2009 - At the health-care hearing, one senator leaned forward to utter dark words:

"We simply don't know if more is better. We do know, however, that more is terribly expensive and is pushing the nation's medical-care system toward a major crisis."

The year was 1986, almost a generation ago. The senator was Wisconsin Democrat William Proxmire, now dead and gone almost four years. But the crisis he warned of lives on.

By "more," he meant the miracles of modern medicine -- high-tech scanners, organ transplants, high-potency pills and all the rest. But those miracles come at a high cost.

Back when Proxmire issued his warning, health care amounted to maybe 10 percent of the American economy. Now, health care eats up $1 of every $6 -- $2.2 trillion a year, the single biggest slice of America's economic pie.

Worse, health-care's share of our spending keeps rising. Ten years from now, experts project that it could snatch $1 of every $5. Go to 2025, and it's $1 of every $4.

Those problems of the future have roots in the past, about a century ago, when the American medical system took shape.

Proper But Pricey

From colonial times through the 19th century, health care was a hit-or-miss matter. Americans with money saw their doctors. Everybody else treated themselves or turned to quacks. The desperately sick showed up at drab and grim charity hospitals.

But in the early years of the 20th century, the system took on the shape we know today. Licensing laws put the quacks out of business. Medical school reforms shut down a host of diploma mills. New, clean hospitals rose across the land.

And doctors did business the way that most still do -- on a "fee-for-service" basis. Fee-for-service means that a doctor charges patients for every service the doctor renders: an office call, an X-ray, a shot, whatever.

The economics are simple: The more doctors do for patients, the more money doctors make. But whether more equals better is an open question.

For example: This year, researchers at Vanderbilt University carried out a federal study on how doctors treat one kind of bladder problem in women. Some doctors dosed the women with medicine. Other doctors counseled the women to change their behavior. Both ways worked equally well. But the medicine way costs a lot more.

The Vanderbilt experts say the doctors who wrote prescriptions knew little or nothing about the counseling option. That same blank spot turns up across all ailments. Many doctors lack (or ignore) guidelines about which treatments work and which don't -- what the experts call "evidence-based medicine."

Instead, these doctors fall back on what they learned in med school and what they've seen in their own careers. And if Treatment A falls short -- well, there's always Treatment B and another fee-for-service billing.

In the 1920s, that costly route injected inflation into the system. By late in the decade, health care ate up $1 out of every $25 in the economy. Many Americans suddenly found pain in paying their doctor.

That's when people started thinking about letting insurance pay the doctor.

A Central 'Fringe' Benefit

A crude kind of insurance program had already been operating for years in the timber camps and railroad construction sites of the largely empty Pacific Northwest. The lack of towns there meant a lack of doctors.

So the timber companies and railroads hired doctors as employees to set broken bones and sew up saw-blade cuts. Those doctors gave up their status as fee-for-service free agents.

Organized medicine -- notably, the American Medical Association, or AMA -- frowned on the notion of doctors as employees. The AMA fretted that penny-pinching employers might take away from doctors some of their free-agent freedom in deciding how to treat patients.

Still, the AMA looked the other way in the Pacific Northwest. After all, hiring the doctors was the only way to treat the workers. But a hired-doctor clinic that opened in 1928 in Elk City, Okla., was quite another matter.

There, farmers paid a set monthly fee to get whatever treatment they needed. The doctors did away with fee-for-service billing. Instead, they drew set salaries.

In medical jargon, this billing system is called "capitation." Unlike fee-for-service, capitation lets patients know in advance how much money will be involved. And if some patients need a lot more treatment than others -- well, the monthly payments from the healthy majority who need little treatment cover the few who need more.

Local doctors saw the clinic as a threat. They snubbed the clinic's doctors and tried to yank the license of the clinic's founder. Similar clinics arose in other locales -- and drew similar scorn from the medical establishment.

In 1929, the capitation system spread to a hospital, Baylor Hospital in Dallas. Any Dallas teacher who kicked in 50 cents a month could get 20 days of free care. The reasoning: Most of the city's teachers enjoyed good health. Their monthly payment would more than cover the handful who checked into the hospital.

Then, the stock market crashed and the Depression set in. Across America, hospitals sat empty because few sick people could afford hospital care. To survive, hospitals banded together in a great big capitation system that came to be called Blue Cross. A monthly fee covered the cost of hospital stays.

Late in the '30s, the capitation system spread to doctors. Blue Shield was set up to cover the costs of doctors' services. (The AMA held its fire on Blue Shield, because Blue Shield was originally set up for poor people only. The AMA figured that Blue Shield would deter the government from sticking its nose into health care.)

Still, only World War II brought health insurance to a big chunk of Americans. With so many men drafted as soldiers, the factories that made tanks and bombers competed for skilled workers. Health insurance might be a big draw. But for the war's duration, government bureaucrats had imposed wage caps.

In 1942, the bureaucrats waived the wage cap for health insurance. As a bonus, they ruled that the fringe benefit wouldn't count as taxable income.

After the war, in 1948, unions won the right to bargain for health insurance. And in 1954, Congress set in statutory stone the tax-exempt status of employee health insurance.

That law confirmed the American Way of Health Care: insurance through the job.

Inflation On Steroids

The sudden swelling of on-the-job insurance drew commercial insurance companies into the system. To ensure a profit, these for-profit insurers took a different tack from the nonprofit Blue Cross and Blue Shield.

Such nonprofit insurers charged a single set premium to all comers -- in the professional jargon, "community rating." But the commercial insurers priced their premiums differently for different customers -- in the jargon, "experience rating."

Experience rating prices premiums cheaply for groups or individuals with few problems -- young people, for example. But for groups or individuals with problems -- the elderly, say, or people with chronic diseases -- premiums cost more, often a lot more, because these people use more services.

Under community rating, the young and healthy subsidize the old and sick. Under experience rating, subsidies give way to profits. Eventually, even Blue Cross and Blue Shield switched to experience rating.

As the cost of covering employees climbed without letup, bosses began to fret. At some point around 1980, Chrysler boss Lee Iacocca snarled that health-care costs "will break this goddamned company if we don't do something about them."

That "something" was the health-maintenance organization, or HMO, a system pioneered by California shipbuilder Henry Kaiser (right) in the 1930s. He cobbled together a network of doctors and hospitals called Kaiser Permanente.

In the HMO way of things, employees surrender their freedom to choose their doctor and to see a specialist on their own. Instead, they're assigned to a primary-care doctor -- a "gatekeeper," who issues (or withholds) permission slips to see a specialist. The gatekeeper's job is to be a patient's case manager -- to see that the patient gets care that's right and needed. The HMO's business people keep a close eye on treatment, all to ward off needless (and costly) "more."

The original HMO plan called for copying Kaiser Permanente by paying doctors as employees instead of letting them bill in the traditional fee-for-service way. But tradition dug in its heels, and fee-for-service persisted.

The exception: Medicare payments to hospitals.

In 1983, Medicare laid down a new law for hospitals, saying, in effect: "We'll pay one set amount for your treating one Medicare patient with one ailment, no matter how much difference in the treatment of individual patients with the same ailment."

Given that Medicare and Medicaid account for a significant share of a hospital's patient load, the hospitals saluted, said, "Yessir" -- and promptly bumped up charges to other patients to recoup what they lost on Medicare and Medicaid. This ploy is called "cost-shifting," and it helps to explain why insurance premiums keep going up -- by 131 percent since 1999.

As premiums keep rising, employers cope by:

  • Boosting the share that workers pay. Ten years ago, the worker's share of an average family policy was $318 a year. Now, it's $779.
  • Tacking on co-payments and jacking up deductibles.
  • Holding down wage increases.
  • At a troubling number of small businesses, dropping health insurance entirely.

In the mid-1970s, 70 percent of working Americans had insurance through their jobs. Today, the number has slipped to 53 percent.
Thus, the call for health-care reform. Otherwise, say those making the call, the crisis will persist and get worse, until our sickly system collapses.

Harry Levins is a freelance writer in St. Louis.