James Tallon
President, United Hospital Fund

Summary of the Keynote Address:
The Purchaser Revolution
Presented at
Envisioning Ethical Atlernatives in Health Care
9 December 1996

Thank you very much, Rev. Bernadine McRipley [Washington Office, Presbyterian Church, USA] I thank you for that very gracious introduction, and my thanks further to Gary Matthews, and to the Reverend Chuck Rawlings who spoke earlier and gave this conference a thoughtful introduction My participation this morning grows out of conversations with them some months ago, and I compliment them on the leadership that has brought us to this point today.

An analysis based on 25 years of health policy and political experience
Let me simply indicate that at the end of this discussion, I do not have the prescription to get us out of the current box. I can draw on 20 or 25 years of experience of health policy analysis, and I can try to talk a little bit about how the forces are coming together, and how they've changed. I can also draw on about 20 years of being a street politician, and getting elected to office every two years, and serving in the New York State Legislature with responsibility for health policy that led me to the circumstance where, as someone indicated, I grew to a position in life where I could do genuine damage. So I'll combine this practical political experience, and will try to describe a little bit of the way in which the health policy issues go together.

A time in health care that is "really a change"
The course ahead of us is uncharted. The message from today's comments is that it's a little difficult because we constantly live with a rhetoric of change and unresolved issues in public life and many aspects of our life. When fundamental and genuine and powerful change really occurs within some aspect of our economy or some aspect of our society, it's sometimes hard to find the language to underline it.. It's almost as if I find I want to wave my hand and say, "It's really a change". This is really a change. Anything I've told you over the last 25 years about a changing environment, is extraordinarily modest in scale to what's happened in just the last three or four years.

Political promises of preservation
Let me set up the discussion by talking a little bit about that process of change. What's interesting is, we have just come out of a political campaign in which at the end of the campaign there were more "preserves" going on in that political campaign than Smuckers has available. Bob Dole was assuring everyone that he was going to preserve absolutely everything, including all of our social programs. The President was talking about, and building his campaign on preservation. It was as if the closer we got to election day, the more the major candidates were trying to assure the American people that absolutely nothing would ever change should either of them be elected. They were both clearly committed, in one form or another, to smaller government, but it was within the irony that those commitments, even though both parties committed in their own terms to smaller government, no one would ever take away, or ever change any program with which the American people had any level of attachment.

But no consensus on financing
We sort of confirmed at the end of that campaign that we really do agree as a society on the provision of services to individuals, we simply have never found a way, at least in recent years, of getting more than a third of us at any given point in time to agree on how to finance the services that we want to have provided. So we heard all this discussion about maintaining all that we have, but we know that what's going on is an absolutely profound change in the financing and structure of health services in America. Let's, just quickly, go through that process.

A fragmented financing system—Medicare and Medicaid
We've had a fragmented system of financing health care in America. It's been our unique American way of developing the financing of this essential service. And you know the elements of it; at least the elements that have governed us in the last 30 years or so. We have the Medicare program, a universal insurance program that has financed care for the elderly, and increasingly over the years, the disabled. We've had the Medicaid program, aimed at financing care for low income families, principally women and children because of the linkage to cash assistance only now recently broken in the welfare reform amendments, welfare change amendments (I hesitate to use the word reform) of 1996.

Employer-based insurance
We had an employer-based health insurance system that started up initially in the late '30's, but principally developed during World War II in relation to the characteristics of the labor market during World War II, and the federal rules that placed limits on the growth of cash wages, led to a lot of fringe benefits being developed outside those governmentally imposed controls. And so, we saw the growth during World War II of the beginnings of an employment-based health insurance system which grew in size and scope up through a peak in the middle of the 1980's.

Some direct government financing
And we've had around the nation, both at the state and local level, urban areas and in rural areas, the direct governmental financing or provision of health care services, via both state and local governments, and, of course, the most direct example of that here is the New York City Health and Hospitals Corporation. We could find similar public systems in any of our larger urban areas in the country. Los Angeles, Chicago, up until recent years in Philadelphia, although Philadelphia has largely abandoned that system. But we could also find in rural parts of the country, direct governmentally financed provision of health care services, and in some cases in small community settings, and in other cases, often connected to the educational function of a state university through large university-based medical centers. So we've had a fragmented financing system. Medicare, Medicaid, employer based health insurance, and direct governmental organization and payment for services, and had for many, many years a fifth group of people who were the uninsured, and that number of people remaining stable in the mid-23, 24, 25 million range for many, many years.

The Deal
The deal in American health care was the following: that the people who ran the system, the physicians and hospitals, principally, would take all of those sources of financing, including a modest level of direct, individual payment, into the system. The people who ran the system would be responsible for taking all of those sources of financing, and aggregating that money in a way so as to provide services for everyone. Now, what that essentially meant was people who did not have a direct source of payment backing them up, the uninsured, or persons for whom coverage was inadequate (and certainly, in some of the states, that describes the Medicaid program) the persons running the system, hospitals and physicians, had the responsibility to take the money that flows through the system, and to somehow produce the services that would be adequate for all.

Included a way of meeting our social obligation to the poor
Now, the empirical data indicate clearly that we never achieved perfection in that model. There is plenty of evidence in the empirical data that suggest that individuals who did not have a direct payment source either got less care, got later care, got care in a somewhat different way then the mainstream, but the empirical data also show that in fact a safety net did exist, and had been created; that while all of the measures of access to care were not equal across the board there is clearly a method in this system by which individuals who don't have a direct payment source are able to obtain a level of care. In any case, for the better part of 25 years, that system was accepted in America and was accepted as a way of meeting our social obligations across the board to the entire population.

The Clinton assumptions
Now, the period with which we're dealing today, as I indicated, is a period of fundamental change. One can find the roots of that change back for an extended period of time. In looking at the history of this, the period in 1994, right after the Clinton Health Plan was sent up to capitol hill, kind of symbolizes, for me, the changing environment about which we're talking. I will not do a presentation, this morning, of the history and the scope of the Clinton Health Plan. One, you've all heard that before, it's been written about in some excellent books that have been published, and could easily use the entire morning's agenda.

The White House gamble
But one comment about that plan, when it was sent up to the Hill, the White House made a bet, a political bet. And the political bet essentially was that while the White House knew that small business was philosophically, and economically opposed to an employer mandate, a mandate that business provide coverage for its workers, their bet was that big business would support it. And the reason, simply, was that over the years big business had been posed in this model as being, to some extent, the victims (use the word advisedly) of cost shifting in the health care economy. In other words, the businesses that provided comprehensive coverage to their employees were alleged, and (with fairly decent documentation in the empirical literature) to be paying more for that coverage then was necessary to support this function of doctors and hospitals taking all the money aggregating it so as to cover everyone in the system.

The logic of the Clinton Plan was that this was a method by which that cost shifting could be driven out of the market, care would be provided, eligibility for coverage would be provided everyone through an employer mandate and through the various subsidies and phase-ins that were built into the Clinton proposal. Even though small business was going to be ultimately opposed, it could somehow accommodate these changes without disruption in the economy. Big business would basically see the wisdom of the proposal and would lead the way to congressional approval.

The gamble turned bad—big business supported small business resistance
Well, as all of you recognize, the bet was just totally wrong. It was in early 1994 when some of the councils of big business got together to look at that plan. In some cases, it was because the leaders of big business were still deeply dedicated to a private sector entrepreneurial approach to health care; some of them had a direct interest in the system. Perhaps they headed a large insurance company that had an existing role in the system. Some of them because they headed large manufacturers of health products and were very concerned about a potential downturn in health care spending. For all of those reasons, but also for the reason that I shall get to—the councils of big business in the country turned down that proposal to mandate that all employers provide coverage.

Influenced by dramatic changes in the economy
When one looks at it, you can find lots of explanations of why they turned it down. But, if one looks carefully, I think what happened was that, at the same time that many of us at the center left of the political spectrum were thinking about how to develop a broader insurance program, and thinking about the terms, and debating the terms—whether you liked the details or not that eventually came out in the Clinton Plan—at the same time, the big business community in the marketplace was actively learning something different, was learning a different lesson. And the lesson that it was learning was essentially that the changes, the dramatic changes that were going on in the American economy effecting business (IBM was no longer IBM, IT&T was no longer IT&T) these powerful forces of international competition were restructuring some of the idea of how large corporations thought of themselves.

New question: for the following amount of money what will I get?
What they learned was that they could apply some of that same thinking to their purchase of health insurance. And in essence, in the years of the early 1990's, led by the big business community, the questions about health insurance were turned on their head. Rather then asking the question any longer, "how much will my health insurance cost next year?" The question was posed, "for the following amount of money what will I get?" And then, "if you want my business, after you've quoted me an answer to that first question (what will I get for the following amount of money?) if you really want my business, discount me 10 percent, or I'll take my business across the street, I'll go to someone else."

The Purchaser Revolution
Basically, what occurred in this period of time, was that we took a system that for 25 years had been physician and hospital driven, had been provider driven, had really been assigned the responsibilities—"here's the money, you figure out how to spend it." (And the hospitals and doctors will remind us all that government helped them along the way.) But, the physicians and hospitals were driving that system. In the early 1990's we flipped over to the purchaser revolution, and the powerful part of this purchaser revolution was that it started in big business, but very soon was mimicked by the governmental programs that purchase care on behalf of large numbers of Americans, particularly the Medicaid program in converting what today is now almost half of the Medicaid population to managed care; with a smaller percentage of the Medicare population over in the managed care programs rapidly growing, double digit growth in the annual percentage growth in the last three or four years in managed care penetration in the Medicare process, in the Medicare program. And so, this purchaser revolution seizes the dynamic of the American health care system in the early 1990's and literally turns it on it's head.

The whole system turned on its head
Now, it's important to understand that, because in any of the elements that are going on, any of the elements of change, what I ask you to do, my keynote for this morning is to step back and simply see the whole system turned on it's head. The flow of power in this system, the flow of information in this system, which had been emanating from the providers of health care now in recent years has emanated from the purchasers of health care, and that's what sets up the choices that we have available to us today.

Review of the old system
Now, take a look at what that means. We'll go back and think the way the old system worked. As I said, the doctors and the hospitals were given the responsibility of aggregating the money, and making the system work, however poorly or well they did that. How did we do it? Well, let's think of the elements of the way in which the health care safety net worked. And we could go around the room and put lists on the board if we wanted to. There was a system of largely not-for-profit hospitals in the country. That was the principle organization, organizing form in the hospital community, some public hospitals, principally, and a system of not-for-profit hospitals with the expectation of a responsibility, a charitable responsibility, a community benefit responsibility to serve the communities that they were serving in return for preferred treatment under the tax codes.

Professional obligations
The professions, medicine among them, had the professional obligation of defining certain ethical responsibilities to provide care to individuals, and if you look at the empirical data, physicians probably have never gotten full credit for the free care that they provided over the years in the fulfillment of those professional obligations. In the marketplace, cost shifting occurred informally, and in some states, New York among them, we actually regulated that cost shifting process so as to guarantee that some would pay more so that others could have access to care, or could be provided care.

Disproportionate share methods Medicare and Medicaid supported medical education
The Medicare and Medicaid programs had specific features built in them called disproportionate share payments after 1990 to provide direct subsidy, through those programs, to hospitals providing large amounts of uncompensated care. Within both Medicare and Medicaid, particularly in Medicare, there were large expenditures set aside for graduate medical education support where the residents in those medical education programs, very important to us here in New York City, in return and along with their learning responsibilities as residents, were providing care on an ongoing basis to many who were medically indigent. You could find other elements in the system if you simply would think of the way in which that safety net was pieced together. And, of course, as I indicated, in many of our communities government was a direct financer and direct provider of services.

The conversion to for-profit
Now, when one steps back and looks at the purchaser revolution, what do we basically see? Across the country, we see, including here in New York, proposals to convert those not-for-profit aspects of the health insurance industry to for-profit status. Physicians to whom we had turned for this professional responsibility find themselves in this unusual situation of now having their practices acquired either by other players within the health care system, or by a significant infusion of Wall Street-based venture capital moving to acquire physician practices.

Venture capital acquires physician practices
Now physicians have not yet become "pork bellies" in a system of commodification, but if one looks at the surge of venture capital that's moved into the acquisition of physician practices just in the last two or three years there is a profound difference in the organization of how doctors are organized, where they fit within the system. But, write down all the other elements of the health care safety net, and what we can see is movement across the board away from the responsibility that element played in a provider driven system toward a very uncertain direction in which the elements of a new safety net in the purchaser driven system are as yet unknown.

The sick person as a cost to the purchaser-driven system
Now, to conclude, let me go through some of the observations of what occurs: One, as we shift to a purchaser driven system, remember what is unleashed in a purchaser driven system is an entirely new force that we didn't need to deal with in the provider environment, and that is management, or the concern for how risk is allocated within the system. Think of it simply in these terms, (and it may be a bit of an overstatement, it may be a bumper sticker, but bumper stickers have some truth associated with them): in the provider driven system a sick person generated revenue to the system; the sicker, the more revenue. In a purchaser driven system a sick person generates costs, and the changing dynamic of the way in which that system assesses the risks associated with persons who are going to place large claims on the health care system is the new challenge with which we're dealing.

Now, what have we seen? We have seen a growth of capitation purchasing. We have seen the aggregation of health delivery units into vertically and horizontally integrated health care systems. We've seen an emerging concern about the way in which risk is allocated among various components of the system. And we've seen significant proposed change in the way in which many of our governmental programs are carried out. Active debates on the future of Medicare, the future of Medicaid, and the future of the direct governmental role are being held by many of our states and, particularly, local governments within the system.

The end of an ethic in which the healthy subsidize the sick
One of the interesting things to remember is that this is not just occurring within health care. There's an excellent article in the National Journal in the November 23rd issue. It's a very thoughtful article about how health care fits into a broader debate in our society about the way in which our public and private retirement systems will work; in fact, the way that many of our social relationships will work within our society. In essence, it points out that for a long time, particularly with respect to health care, to some extent with respect to retirement, but principally in the health care field, we have had systems, essentially, in which the healthy subsidize the sick. In which the young subsidize the old, and which those who are better off economically subsidize those who are less well off economically. On each one of those dimensions, what we see are the current relationships breaking down.

At what point will we define an ethical standard?
Now, as we go forward with respect to this—and I think the particular challenge that may exist in the way in which you have outlined the program today—is essentially this: At what point, and where will we define some of these questions as the standard of the ethical and moral issues which this group today is able to bring to this sort of road map that I've tried to lay out about the way in which the system is evolving.

But some ethical issues are very complex
On the other hand, there was a front page article last in the Wall Street Journal about a new class of drugs that had a very powerful effect in terms of reducing cholesterol levels. And when one looked at that article and looked at the high cost of the medication, looked at the potential, enormous benefit of the medication, but recognized the difficulty of predictability of who would benefit specifically from the introduction of that medication—what one has to step back and say is that there are genuinely complicated resource allocation questions built within the rules of the game in managed care, and I think that's the place where we have to take our discussion.

Is the core problem the for-profit motive?
And then, finally, of course, there is the very central question: Is the core problem here, that we are proceeding with a for-profit motive as opposed to a not-for-profit motive? Now, I would phrase the dilemma in these terms: is there something inherent in the organizational form of for-profit or not-for-profit that is flawed, or that is beneficial, or is the real question to what degree of accountability do we hold them? What do we expect from these managed care organizations that’s the right place to set the standard?

The current combination of events is destroying 30 years of relationships
I’d sum it up in this respect, that as I look at this system there are many, many things that are going on in this system that do not, for me, raise absolute standards of right or wrong, but it is the combination of things that are going on that are effectively destroying the relationships on which we have depended for 30 years without creating the nexus of the new set of relationships that will allow the system to operate over the next generation or two.

The ultimate dilemmas is: in the purchaser’s revolution only those with buying power get care
Perhaps, in the final analysis, the greatest difficulty that emerges in the purchaser revolution is that I can’t envision a purchaser driven system that works effectively when a significant segment of the population doesn’t have purchasing power. And therefore are we then back at the question, of whether or not we can broadly recreate a social insurance model, a mandatory social insurance model, or can we build the incentives in a privately driven system? A dilemma being that if I’m encouraging people voluntarily to purchase health insurance coverage, in terms of rational, self-interest behavior, healthy people don’t have the strongest motivation to purchase that coverage. Or, thirdly, can I find another uniquely American way of mixing and matching the elements of the system so that we can evolve from where we’ve been over the last 30 years on into a satisfactory future?

I told you at the end of this that I was simply going to leave you with a question, but that’s the question for the day, and I look forward to your efforts to answer it. Thank you very much.

 

Return to Conference Page