US Health Care: Why Privatization Is Inefficient - Part 3

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The Industry of Illness

It is a reality of our time that the same companies promoting health care products are also largely responsible for underwriting their research. Skepticism about this model of business has led to pharmacoeconomic studies of the popular antidepressants, which demonstrate a clear association between study sponsorship and quantitative outcome (Baker et al., 2003). But beyond concerns about the safety of the products we use and the efficacy of the medications we take (and these are valid concerns), we should also be wary of the increasing role of health care corporations as marketing machines, both to physicians and consumers.

Promotional spending in the form of direct-to-consumer advertising increased from $266 million in 1994 to $2.6 billion in 2002 (Donohue & Berndt, 2004), making the research and marketing of pharmaceuticals one of the most significant and salient initiatives competing for consumer attention today. In addition, health care companies have long courted physician approval by the provision of free samples, books, brochures, posters, videos and a myriad of branded and logoed promotional novelties including Frisbees, pens, clipboards, staplers, paperweights, ID tag holders, and even items of clothing (S. Sabesen, MD; J. Campbell, MD; & D. May, MSN, personal communication, 2001, 2005). In many respects, new health care products are launched the way that motion pictures are, and borrow freely from the product placement techniques now observed in recent movies. The items created are especially chosen to be highly visible, worn or used in a physician's office, administrative desk, waiting area, or examination room. By their mere presence they convey the impression of approval, whether or not it is a favourite product or brand of the physician or clinic. Furthermore, this form of covert advertising has the potential to guide patient interest as much, if not more so, than a commercial on television. Trust of a physician generalizes to trust of the elements within their environment.

For the implications of this on efficient, quality health care, we need only return to the skewed pharmaceutical studies discovered by the research of Baker et al. (2003). These industry or manufacturer funded studies consistently favoured the latest products of the respective companies over older drugs, making the public most likely to ask for (and receive) products for which the least amount of longitudinal data is available, but which they have seen on television or in the office of their doctor.

Increased consumer demand paired with questionable efficacy may leave large numbers asking for and receiving treatment which may be of little use, and may be damaging given that side effects are only well understood by longitudinal study.

The most troubling aspect of industry marketing though, is the continuing education of doctors by way of the aforementioned promotional literature, videos and self-funded research. With long hours, high patient loads and limited time for reading, marketing represents the most consistently accessible source for current treatments. Even if a physician initially greets these with healthy skepticism it may be difficult to remain objective over the course of years where there has been a consistent lack of time, opportunity and energy for study and reflective thought. Additionally, a familiarity with these new products is required. How many print and video advertisements neglect to include the phrase “Ask your Doctor”?

Administration — A System-Wide Failure

The most inefficient aspect of American health care is not its treatment management, but its office management.

Woolhandler & Himmelstein (1997) found that for-profit hospitals spend 23 percent more on administrative costs than comparable private not-for-profit hospitals, spend 34 percent more than public hospitals, and have higher total costs per inpatient day and per discharge. While this begs the counter-argument that the tax exemptions for not-for-profit and public hospitals allow for their lower administrative costs, their study found no evidence of this.

Unfortunately, upsizing in administration is an industry-wide trend, and one shared by private, not-for-profit and public hospitals (Woolhandler & Himmelstein, 1997). The overhead of practitioners is similarly rising, with office administrative and clerical staff increasing from 613,000 to 819,000 full-time positions between 1990 and 1994. Over the same period, HMOs and other health insurers saw their expenses grow by $20.1 billion, from 12.8 percent to 14.8 percent of consumer premiums (Woolhandler & Himmelstein, 1997).

In a subsequent cross-border comparison, Woolhandler, Campbell, & Himmelstein (2003) observed the differences in health administration costs between Canada and the United States. Their analysis of 1999 figures showed that U.S. expenditures on administration totaled $294.3 billion, or $1,059 per capita – over three times the amount of the $307 per capita spent by Canada. After exclusions, this amounted to 31.0 percent of health care expenditures in the United States versus only 16.7 percent of Canadian health care expenditures.

This disparity is reflected in the relative percentages of administrative workers in terms of their numbers within the health care labour force as a whole. Excluding insurance industry personnel, the percentage of administrative workers within the U.S. health care labour force rose from 18.2 percent to 27.3 percent between 1969 and 1999. In Canada, the relative make-up grew from 16.0 percent to 19.1 percent between 1971 and 1996 (Woolhandler et al., 2003).

To put in this in a clearer perspective, and understand the significance that bureaucratic waste has on the lives of American citizens, consider the state of U.S. health care in 2003.  Administrative costs consumed at least $399.4 billion out of a total $1,660.5 billion spent that year. With this expenditure, the U.S. is wasting more on health care administration than it would cost to provide health care to all of the currently uninsured (Himmelstein, Woolhandler & Wolfe, 2004).

With its national health insurance program, Canada has an overhead of only 1.3 percent (Woolhandler et al., 2003). While this is much leaner than any U.S. program, Medicare compares favourably with a 2% to 3% administrative overhead. Lagging far behind, for-profit health maintenance organizations and insurance companies have an overhead of between 20% to 30%, which is necessary to cover the expenses unique to private sector businesses, including stockholder dividends, lobbyists, political action committees (and associated political donations), large executive salaries, marketing, and wasteful paperwork (Conyers, 2003).

By adopting the Canadian model of health care, New Mexico with 373,000 uninsured residents would have saved $1.5 billion on health administration costs in the year 2003 (or $4,022 per uninsured resident). Maine, which has 132,000 uninsured residents might have retained $1.325 billion in savings (or $10,037 per uninsured resident) if managed at Canadian levels. In Massachusetts, where there are 560,000 uninsured residents, a universal, single payer reform could have saved $8.556 billion (or $16,453 per uninsured resident) (Himmelstein et al., 2004).

In all, streamlining U.S. administrative health care overhead to that of Canadian levels would have saved $286 billion in 2003, or approximately $6,940 for each of the 41.2 million Americans who were without health care in 2001. This far exceeds the amount than would be needed to provide universal insurance coverage (Woolhandler et al., 2003). While this is one of the most recent studies of its kind, it is not the first to make this determination. In 1991, the U.S. Congressional Budget Office also concluded that a single-payer system (“Medicare for All”) would save $100 billion dollars per year. Economists estimated that not only would this provide coverage for all of the uninsured (in 1991), but would leave enough surplus to substantially help the underinsured as well (Conyers, 2003).

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  • Baker, C. B., Johnsrud, M. T., Crismon, M. L., Rosenheck, R. A., & Woods, S. W. (2003). Quantitative analysis of sponsorship bias in economic studies of antidepressants. British Journal of Psychiatry, 183, 498-506.
  • Conyers, J. (2003). A fresh approach to health care in the United States: Improved and expanded Medicare for all [Editorial]. American Journal of Public Health, 93(2), 193.
  • Donohue, J. M. & Berndt, E. R. (2004). Effects of direct-to-consumer advertising on medication choice: The case of antidepressants. Journal of Public Policy & Marketing, 23(2), 115-127.
  • Himmelstein D. U., Woolhandler S., & Wolfe S. M. (2004). Administrative waste in the U.S. health care system in 2003: The cost to the nation, the states, and the District of Columbia, with state-specific estimates of potential savings. International Journal of Health Services, 34(1), 79–86.
  • Woolhandler, S. & Himmelstein, D. U. (1997). Costs of care and administration at for-profit and other hospitals in the United States. The New England Journal of Medicine, 336(11), 769-774.
  • Woolhandler, S., Campbell, T. & Himmelstein, D. U. (2003). Costs of health care administration in the United States and Canada. The New England Journal of Medicine, 349(8), 768-775.