Rationing Health Care Is Not Necessary


Rationing has long been
a dirty word in the health care reform debate. HMOs hotly deny that they are
engaged in rationing. Politicians decry rationing, whether it is inflicted
directly by HMOs or indirectly by lack of insurance. Polls consistently
indicate that a large majority of Americans oppose rationing as a means to
reduce health care spending.

The call for
rationing first became audible in the late 1980s as health care inflation
worsened. It got louder in the early 1990s as universal health insurance rose
to the top of the nation’s agenda. It has grown louder still over the last
five years as it has dawned on pundits that HMOs are incapable of reining in
health care inflation. Here are some examples of statements advocating medical

  • “Eliminating
    inefficiencies in the system can provide brief fiscal relief, but rationing
    of beneficial services, even to the well-insured, offers the only prospect
    for sustained reduction in the growth of health care spending” (Henry Aaron,
    a prominent economist with Brookings Institute, in a 1990 article for
  • “Successful cost control
    will require rationing of services to the very ill” (Aaron, again in a 1992
    article for Health Affairs)
  • “A country can provide
    unlimited care to a portion of the population or limited care to everyone.
    But it can’t provide everyone with unlimited care, because the demand for
    health services knows no end” (Jane Bryant Quinn in a 1993 column in the
    St. Paul Pioneer Press
  • “[P]olitical leaders must
    tell the public the truth…: We can’t afford unlimited health care.
    Rationed care is inevitable” (Stephen L. Cohen, a syndicated columnist in a
    1999 column for USA Today)
  • “The question is…not if
    we ration—but how” (David Broder in a 1999 column for the Washington Post)
  • “No one dares discuss
    rationing, the most toxic but inevitable of all subjects,” (investment
    banker and government-waste guru Peter G. Peterson in a 2000 op-ed for the
    New York Times)

    • Why It’s Time for
      Health Care Rationing
      (a book published by MIT Press in 2000)

    To give you
    some idea of how painful a deliberate debate about rationing will be,
    consider this exercise developed by American Health Decisions (AHD), a
    nonprofit that, according to its web site, “helps people understand health
    care choices.” AHD conducted focus group sessions in which subjects were
    asked to state how they would spend $360,000 on the following 6 categories
    of patients, each of which would cost $120,000 to treat: 4 second-stage
    cancer patients, 2 heart patients, 2 elderly hip-replacement patients, 1
    elderly kidney patient, 1 schizophrenic child, and 4 adults blinded
    accidentally. (Oddly, the cancer and heart patients were described as “with

    You see the
    problem: These six categories of patients would cost $720,000 to treat, but
    in this cruel, pretend world you’ve been asked to play in, you only have
    $360,000 to spend. Who gets thrown off the island? And by what rationale?
    Can we cross the three elderly patients (the hip-replacement and kidney
    patients) off our list and put the schizophrenic child on the must-save list
    on the basis of age? If you’re into pitting kids against the elderly, why
    not add the cancer and heart patients to the must-save list because they
    have kids to raise, whereas the four blind adults don’t have kids and the
    elderly patients, if they had kids, have already raised their kids? This
    implies that you think elderly people are dispensable.

    If those
    choices are not painful and baffling enough for you, consider this choice
    actually posed to the citizens of Oregon in the late 1980s: Should Oregon’s
    Medicaid program pay for 34 organ transplants for poor people or should it
    pay for prenatal care and delivery services for 1,500 poor pregnant women?
    This was how the choice was initially framed for Oregonians in 1987 after
    Colby Howard, a seven-year-old Oregon boy, contracted leukemia a few months
    after the Oregon legislature discontinued Medicaid coverage for organ
    transplants. Had Colby been diagnosed a few months earlier, Oregon’s
    Medicaid program would have paid for the bone marrow transplant that might
    have saved his life. Colby’s mother had managed to raise $80,000 of the
    $100,000 deposit required by the hospital when Colby died. In the furor that
    followed Colby’s highly publicized death, rationing advocates argued that
    saving Colby would have meant short-changing other poor people.

    But are the
    rationing advocates correct? Is it true that the only way to insure all
    Americans is to ration “beneficial services,” as Aaron put it? No, it is
    not. Those who call for rationing now are wrong and unethical. It is
    unethical for “experts” and “ethicists” to call for medical rationing before
    we have had a debate about the wastefulness of the U.S. health care system.
    It is unethical to tell the public that our only choice is one that pits
    Colby Howard’s bone marrow transplant against the medical needs of 1,500
    pregnant women, when in fact we could debate many other choices, such as
    Colby’s transplant versus a tiny sliver of the U.S. drug industry’s obscene
    profits (those profits are four times those of the Fortune 500). Or we could
    debate prenatal services for 1,500 women versus paying the annual salary of
    one or two HMO lobbyists. Or we could debate treating the two heart patients
    presented in the AHD exercise versus a half-dozen HMO advertisements.

    defined to mean the denial of medical services that benefit patients, is
    rational and ethical only under circumstances in which resources are clearly
    limited. For example, it makes sense for medics on a battlefield to engage
    in triage, that is, to treat first those soldiers who are alive but
    seriously wounded because they stand to benefit more from treatment than
    those soldiers who are dying or are less seriously wounded. Here’s another
    example: Because only 5,000 livers become available in America each year
    while 7,000 Americans suffer liver-failure annually, it makes sense for
    doctors to give liver transplants to the 5,000 patients who will benefit the

    But it is
    ludicrous to claim that resources are scarce in the U.S. health care system.
    The U.S. system, which gobbled up $1.2 trillion in 1999, is grossly
    inefficient. Experts on both the left and the right share this assessment.
    Here is an excerpt from a 1989 article in the New England Journal of
    by Alain Enthoven, a conservative Stanford economist and one of
    the nation’s best-known proponents of a market solution to the health care
    crisis: “The present system is wasteful in many respects…. Much care
    appears to be of unproved value. There is considerable duplication and
    excess capacity in our medical facilities…. We have a system which is
    neither efficient nor fair.” Here is a comment taken from the front cover of
    the July 1992 Consumer Reports, a magazine that has endorsed a
    single-payer system: “This year we will throw away at least $200-billion
    [almost a fourth of total U.S. spending in 1992] on overpriced, useless,
    even harmful treatments, and on a bloated bureaucracy.”

    By my
    calculations, the U.S. health care system may be wasting up to $300 to $400
    billion dollars a year. To put this in context, it would cost about $30
    billion to cover the nation’s 43 million uninsured with typical insurance,
    and perhaps $40 billion to cover the uninsured with insurance that has no
    deductibles or co-payments.

    The waste in
    the U.S. system may be sorted into five categories: (1) unnecessary
    services, (2) excessive administrative spending, (3) excess capacity, (4)
    excessive prices, and (5) fraud. Research on the last three categories is
    sparse and much of the research on the first two categories (unnecessary
    services and excessive overhead) was done in the early 1990s when the nation
    was engaged in a debate about which health care reform proposals would best
    address the inefficiency of the nation’s health care system. Needless to
    say, these shortcomings in the research mean that a precise estimate of the
    wasted expenditures is impossible to derive.

    But you don’t
    need a precise estimate of the total waste in order to accept the argument
    that it is unethical to ask Americans to debate rationing before we’ve
    debated whether the waste in the system is acceptable. You need only know
    that the evidence in support of the assertion that the U.S. system is
    wasteful is compelling. A conservative estimate of the cost of excessive
    administration spending and excessive prices alone comes to 15 percent of
    total health spending.

    administrative spending refers both to the administrative spending of
    insurers and medical providers (doctors, hospitals, etc.). Twenty-five
    percent of the one trillion dollars we spend on health care each year is
    spent on administering the system. No one claims that it is possible or
    desirable to reduce administrative spending to zero. The issue is whether we
    could spend less than a fourth of our health care dollar on clerks, HMO
    doctor police, ad writers, lobbyists, merger specialists, and a host of
    other functionaries who do not provide health care to patients. The evidence
    suggests that we could cut the share of our health care dollar going to
    administration down to 10 to 15 percent. In other words, we’re wasting $100
    to $150 billion annually in administrative costs alone.

    studies indicate that administrative spending grew rapidly as managed care
    spread. Because HMOs hire people to supervise doctors and hospitals, and
    because doctors and hospitals hire people to deal with HMOs, this should
    surprise no one. In a 1996 article in the American Journal of Public
    , David Himmelstein and two Harvard colleagues demonstrated that
    employment of all administrative personnel (that is, administrators in both
    the insurance and the provider sector) grew by 288 percent between 1968 and
    1993 while the number of physicians grew by just 77 percent. A 1996 paper
    published in Health Affairs reported that between 1980 and 1993
    hospitals increased their administrative staff by 47 percent (while cutting
    their nursing staffs by 7 percent). In Minnesota, a state that, along with
    California, deserves the title of “the cradle of managed care,” HMO
    administrative expenditures rose 403 percent between 1980 and 1991 (the
    years in which HMOs took over Minnesota’s system) while HMO expenditures on
    medical services rose 255 percent.

    Studies that
    attempt to measure excessive administrative spending by insurers (as opposed
    to providers) typically compare private-sector U.S. insurers to Medicare or
    to the national systems of other countries, notably, Canada. Medicare’s
    overhead is 2 to 3 percent while the overhead of private-sector insurance
    companies ranges from 15 to 30 percent. If you give Medicare a dollar in
    taxes, Medicare will keep 2 or 3 cents to pay the salaries of its staff, its
    utility bills etc., and will pay out 97 to 98 cents to doctors. But if you
    give a dollar in premiums to an insurance company, it will keep 15 to 30
    cents for overhead and pay out 70 to 85 cents for medical services. The
    overhead costs of Canada’s “single payer” system are about 1 percent—even
    lower than Medicare’s (probably because Congress requires Medicare to
    contract with private insurers to process Medicare claims).

    It is not
    hard to see why Medicare and Canadian health care administrative
    expenditures are so low. Unlike Aetna or Blue Cross Blue Shield, Medicare
    and Canada pay little or nothing for marketing, quarreling with doctors
    about how they should practice medicine, underwriting (which means doing
    research on a patient’s health history and setting premiums accordingly),
    wining and dining state and federal legislators, paying high salaries to
    executives, and paying dividends to stockholders.

    Now let’s
    switch the subject from insurer overhead to provider overhead. The studies
    that have attempted to measure excess administrative spending by providers
    have compared U.S. physicians and hospitals to Canadian physicians and
    hospitals. In 1991, when single-payer legislation was still on the
    Congressional agenda, the General Accounting Office published a report on
    the administrative savings the U.S. could enjoy if its administrative costs
    (for both insurers and providers) were as low as those of Ontario, Canada’s
    largest province. The GAO found that U.S. providers would enjoy
    administrative savings equal to 4.5 percent of total health care spending,
    primarily because billing for physicians is so much easier when they have to
    bill just one insurer rather than dozens or hundreds, each with different
    forms and different hoops to jump through.

    So if we
    could reduce insurer overhead to the levels of Medicare or the Canadian
    system, and if we could reduce provider overhead to the levels of the
    Canadian system, how much could we save? In the same study in which it
    analyzed the differences between U.S. and Canadian provider overhead, the
    GAO also reported that total savings on administrative costs at the insurer
    level would equal 4.5 percent of total spending. In other words, the GAO
    concluded that total savings to the U.S. in administrative savings alone
    from switching to a single-payer system like Canada’s would be 9 percent,
    or, in current expenditures, about a billion dollars. The GAO concluded, “If
    the…single-payer features of the Canadian system were applied in the United
    States, the savings in administrative costs alone would be more than enough
    to finance insurance coverage for the millions of Americans who are
    currently uninsured. There would be enough left over to permit a reduction,
    or possibly even the elimination, of co-payments and deductibles [for the
    insured and uninsured], if that were deemed appropriate.” The GAO
    conclusions would be just as valid for an American-style single-payer run by

    Other studies
    have reported that the administrative savings (for insurer and provider
    overhead combined) achievable by an American single-payer system may be
    higher than the 9 percent derived by the GAO, possibly as high as 15

    Americans should ignore pleas from “ethicists” to debate health care
    rationing until such time as we have debated whether we want our health care
    dollars being used to pay for Blue Cross Blue Shield advertisements and HMO
    doctor police rather than, say, bone marrow transplants for poor kids with
    leukemia or hip replacement operations for elderly people with fractured
    hips.                      Z