Joseph Califano was an early exponent of economic rationalism. In 1986, eighteen years ago he wrote a book advocating the use of economic levers and the manipulation of incentives and disincentives in order to secure economic outcomes in health care. He strongly promoted DRG payments and managed care.
Califano pointed out that doctors' economic wellbeing and welfare was as important to them as to any other citizen. Doctors could be made to serve corporate interests if corporations could control their incomes and their careers. Citizens in the USA have been suffering from the consequences ever since.
This page examines the basis for his theories contrasting them with more traditional health care ethics and values. It examines and challenges the assumptions on which they were based. Quotes from his book are contrasted with what has happened over the last 18 years. The reasons why his solutions failed and why they made the situation worse and continue to do so are examined.
Quotes from "America's Health Care Revolution"
What ever happened to common sense?
The story of Medical Ethics
The conflict between a doctor's duty to serve patients and the opportunities to exploit their vulnerability for personal gain have been recognised for well over 2000 years. A strong system of professional ethics building on the Hippocratic tradition has acted to constrain unsavoury conduct, and foster trust and trustworthiness.
It has long been recognised that such an ethical system could not withstand threats to the doctor's well being or to that of his family, who would generally be seen by the doctor as a higher priority. An unwritten social contract developed. This provided security in return for trustworthiness. Doctors, almost always male, were trusted to extract a reasonable income from their patients. In return doctors were expected to give a dedicated service and preserve equity by modulating charges so that patients paid according to their means rather than the service provided. The rich paid more to supplement the poor.
Probity and character were consequently important prerequisites for medical practice, both in the profession and in the community. This system worked while the health professions enjoyed a cohesive culture built around values, and while their conduct and dedication was valued and supported by the public.
Through most of this period the bulk of
medicine was supportive rather than curative so the consequences of
failures in care were less profound.
But professionalism bends
Doctors are members of the community and professionalism has always been vulnerable to and bent before strong pressures in the community. This is well illustrated by fascism, communism and apartheid. Under pressure from these ideologies sections of the profession identified with establishment thinking and cooperated in practices which others saw as unethical. Others in the medical profession maintained ethical standards and battled the system within the limits posed by risk of retribution and family responsibilities. The response to marketplace beliefs is no different.
Professional ethics and values have come
under increasing strain from commercial pressures. Standing in the
community has increasingly been equated with wealth and the market.
Doctors have expected their rewards to reflect their status and
increasing skills. The social contract withered.
Compounding this has been the rising costs of care, the development of third party payers, the intervention of government, the need to contain costs, an explosion in medical knowledge, increasing complexity, and the necessity for cooperating teams. The benefits of treatment have grown dramatically. As a consequence failures in care have become far more serious fueling a litigation industry.
These changes have not only created a wealth of ethical issues and ethical conflicts but have placed greater pressures on ethical structures, and threatened the doctor's personal security.
In the USA in particular, personal freedom and individual rights have been fundamental foundation stones in building the structures of society. Less emphasis has been given to the rights of society and to the common good. Legality rather than probity dominates decisions and actions. The marketplace was far more closely identified with American values than in other countries in many of which probity considerations played a much larger role.
The rights of individuals (and corporations)
to compete in the market were enshrined and protected. While
hospitals were mostly not for profit and care was still provided free
to those unable to afford it, medical practice became commercial more
rapidly than in other countries. In the USA every citizen was
entitled to set up business and there were fewer restrictions on
this. When third party payers (Medicare and insurers) were
established in the 1960s medical, lawyer and other entrepreneurs saw
the opportunities and entered the marketplace establishing market
listed companies responsible to shareholders rather than patients.
This commercialisation placed even greater
pressure on costs and by the 1980's rising medical costs were a major
concern. US health care became the most inequitable and the most
expensive in the developed world. US manufacturers had contracted
with unions to provide health insurance and the costs were making US
products uncompetitive on world markets. Government were paying more
via Medicare and Medicaid. The problems were in the market and the
market responded with marketplace solutions, so compounding problems.
This was the Reagan era. Reagan in the USA
and Thatcher in the UK had both adopted an economic ideology which
sought to control and drive all facets of society using market
forces. Control and outcomes were accomplished using economic levers
which ultimately rewarded or penalised individuals economically for
meeting or failing to meet economic goals. This system of thought has
been refined and applied indiscriminately to every facet of society.
It has become global.
This outcome and rewards based ideology seems to be no more than applied behaviorism - a carrot and a stick. Behaviourism was popular in education in the 1960s and 1970s. While it achieved its knowledge objectives it seriously compromised cognitive processes, particularly the reflective thought which is so essential to advancing the human condition. It seized on and dominated computer based learning, obstructing the effective use of technology for 30 years. Behaviourism has since been abandoned in education. As a medical educator I fought and resisted the application of behaviourist theory to education.
I argue that exactly this same impact on cognitive processes lies at the root of the many problems and failures which have resulted from the application of economic rationalist thinking. This applies not only to health care but also to other essentially non market professional activities. That there are fundamental flaws to this approach is well illustrated by major failures in the heart of the marketplace - Wall Street.
I am not arguing that behaviourism and
economic ideology fail to attain their specific measurable
objectives. The concerns relate to their unmeasured consequences, the
impact on the whole of society, and the consequences for those
activities which are essentially social and cooperative rather than
commercial and competitive. Australian of the year Professor Fiona
Stanley dealt with some of these issues in her speech to the
Australian National Press Club during 2003.
Fundamental conflicting values
A fundamental medical ethical constraint is that the care given to a patient should be directed to meet her medical needs and should not be influenced by economic pressures. This fundamental ethical principle is enshrined in laws prohibiting kickbacks to doctors in most countries including the USA.
While the potential adverse consequences of kickbacks in any form for all those involved in the health care process (including managers and corporate executives) are equally bad this is not widely recognised or confronted. This web site documents the consequences.
In contrast economic ideology dictates that the sort of economically frugal care desired should be attained by manipulating the incomes and the prospects for doctors. Doctors order investigations and treatment, effectively controlling costs. In essence economic theorists seek to control this and accomplish their objectives by manipulating doctors' economic well-being and so threatening their families.
Ethics is a reflective process and it is
hardly surprising that professional ethics have bent before these
pressures. A functioning and responsive human society is in essence a
Failure to resolve the conflicts
It is also not surprising that legislation is a mess. On the one hand paying incentives to influence care is illegal and on the other similar practices with the same consequences are considered legitimate and essential for reforming health care. Attempts have been made to define and legislate practices which are essentially kickbacks in such a way that they are legal. It does not work as this does not alter their consequences.
The entire US health system and much of the system in other western countries has been based on attempts to get control of the medical profession by economic incentives and disincentives of one sort or another. Health care providers have succeeded in getting the medical profession to boost their profits (and push up costs) by tailoring care to corporate objectives. Managed care has similarly reduced costs by using economic incentives and disincentives to reduce the care provided by doctors.
Not unexpectedly such a system has been socially disastrous for citizens. Multiple layers of leveraged competition generate costs which make the US system the most expensive health system in the world. In the face of the facts our own Graeme Samuel has tried to sell a similar system of economic levers to Australia and the rest of the world. One could define a dysfunctional ideology as a theoretical system of understanding which becomes more real for believers than society itself, and more real than the consequences of applying the theory.
Joseph Califano was Secretary of Health, Education, and Welfare 1977-79 and an architect of Medicare and Medicaid in the USA during the Reagan era. He subsequently became chairman of Chrysler Corporation's committee on health care at a time when the medical expenses of present and past employees and their relatives was pushing Chrysler towards collapse. He was a strong advocate for the use of market forces to reform health care to contain costs. His economic analysis of the US health care scene was revealing of what was to come. It was his marketplace solutions which are so disturbing and whose implementation has had such an adverse impact on health care.
In typical "econothink" Califano considered
greedy doctors as the prime problem. To him professionalism was a
closed shop and a marketplace anachronism. He considered that the
control of doctors incomes and careers was the most effective way to
force them to do what he wanted and so deal with the economic
problem. Califano rediscovered the vulnerability of doctors to
threats to their well being and the well being of their families. He
applied it to the marketplace. The exploitation of this insight lies
at the heart of the many problems in the US health system.
As Califano saw it
Economic theorist's examine health care primarily within a marketplace framework. They see it as a competitive business rather than a cooperative community activity. Within this system of thinking Califano's conclusions about doctors and professionalism have validity. When any other conceptual system is used the arguments are seen to be flawed.
Health care has been wrongly defined within limited theoretical constraints. Economic ideology does not adequately define and embrace our complex humanity. The market is not an effective vehicle for all our activities. Twentieth century establishment groups have grasped the simple one size fits all model and have applied it to the whole of society. This "debris of the 20th century" litters the 21st.
When Califano left the government he joined
Chrysler which was suffering from the cost of providing health
insurers for employees. He set about reorganising health care and
successfully pushed down costs for the company, claiming that this
had no adverse impact on care.
The Consequences of Califano's views
It is clear from his book that Califano, an adviser to Reagan saw professionalism and the doctors who controlled treatment as the cause of the rapidly increasing health care costs in the USA. He did not understand the effect of market pressures on situations where social responsibility and marketplace priorities are in conflict.
Employers paid health care insurance for their employees and the costs were making US products uncompetitive. Califano was among the first to urge corporate groups to take control of doctors incomes and their careers. He urged them to use this power to control the care given and so curb spending on health care. He demonstrated how effective this was by markedly reducing Chryslers health care costs. He claimed that this had no adverse impact on care.
In essence Califano's solution to problems due to an excessive intrusion of the market into health care was the imposition of a set of economic levers to create incentives and disincentives in order to get desired outcomes. These included DRGs and managed care. The control of doctors using economic levers was a part of this. This was simply applied behaviourism.
For profit corporations like Tenet/NME and Columbia/HCA used Califano's insights to bind doctors and hospital managers to the corporate profit mission and push services, costs and profits up. Managed care is a direct application of Califano's principles to increase profits by keeping costs down. In economic theory the two opposing forces should balance and so ensure adequate care while restraining costs. In practice the patient is squeezed between them and pillaged by both.
The USA is now experiencing the consequences of Califano's thinking. There is widespread disillusionment and anger. Australia's past minister for health, Dr. Michael Wooldridge and ACCC chairman Graeme Samuel came from the same position and were almost as critical of the profession. They attempted to implement Califano's solutions in Australia.
I have set out here some extracts from Califano's 1986 book in order to give their flavour and the thrust of Califano's arguments. I have selected those bits that are relevant to current political and business ideology, that illuminate the situation in the USA and that illustrate corporate and political patterns of thought. These have changed little in 18 years.
It is interesting to examine what actually happened over the 18 years since this book was published and to ask ourselves why Califano was wrong and why his solutions failed. At the end I make some comments, particularly about the consequences of Mr. Califano's health care revolution in the 10 years since the book was published.
The slightly coloured sections indented and in smaller type are my comments indicating what has actually happened in the 18 years.
p 3 A revolution in the American way of health is under way, and it's likely to be as far-reaching as any economic and social upheaval we have known.
The revolution promises to be bruising and bloody. At stake are who gets how much money out of one of America's top three industries, who suffers how much pain how long, and who gets the next available kidney, liver, or heart: in short, who lives and who dies --- and who decides.
The revolutionary forces at work are
p4 To fight rising costs and spur competition, large corporations are embracing health maintenance organizations which they once derided as socialistic.
p5 Medicine's high priests, the doctors, have said once too often, and with an arrogance we no longer accept, that only they know what to prescribe, where to treat us, and how they should be paid, Corporations, unions -----etc. ------ have had it with the profligacy's of the American health care industry.
p6 In 1984 Allstate Life Insurance studies revealed to Executive Vice President Robert Roberts that 30 percent of all medical costs resulted from waste, duplication, fraud and abuse.
p6 Medical featherbedding abounds. Doctors and dentists perform simple medical procedures that paramedics and nurses could do at far less cost and just as safely and competently. The medicine men and women provide unnecessary medical services and prescribe drugs patients don't have to take to get well. Hundreds of hospitals admit patients who shouldn't be there and keep those who should too long. Medical equipment companies sell hospitals and doctors expensive equipment they don't need. Lawyers seek extravagant verdicts for alleged medical malpractice and pocket an average of 30 percent, plus expenses, of what the juries they manipulate award.
p7 The American way of health has been voracious in its pursuit of more and more money, too often unrelated to better care. Unless we change its course, our health care system will break the bank and set off the nastiest generational and political conflict our nation has ever experienced, provide increasingly extravagant first-rate health care to fewer and fewer Americans, and put life-and-death power in the hands of government, which no free people can tolerate.
p9 There's hope because the genius of American business, determined to compete abroad, is turned on making our doctors and hospitals more efficient suppliers.
Califano's criticisms of what was happening were valid but he saw individuals and doctors rather than social structure as the root cause.
Most large US corporations provided health insurance as part of deals negotiated with unions in the 1960's. The ever increasing cost of health care was reflected in the cost of corporate products which had become uncompetitive on the world market. This did not happen in other countries. It was the manufacturers who drove the USA into managed care.
p10 Our best hope to change the health care system rests in an awakened, competitive world of business purchasers demanding and bargaining for high-quality care from a variety of providers at much lower cost.
If the market and competition for profit is the cause of the problems then this is an attempt to put out the flames by stoking the fire.
p17 We rejected the myth that aggressive cost controls would reduce the quality of care. Unnecessary hospitalisation is an increased risk. Unnecessary surgery is an inexcusable risk. So are unnecessary X-rays, blood tests or transfusions, or biopsies, and other lab tests. One of the first conclusions we reached was that cost controls and efficient health care delivery were essential to assuring our employees care of the highest quality.
Califano is describing the steps taken by Chrysler when he became chairman of Chrysler Corporation's committee on health care. He uses this as an example of what can be achieved.
The dictum that reducing costs would increase efficiency and improve care became an unchallengeable market truth propounded by market reformer after market reformer, both among providers and HMOs. In practice cutting costs usually means reducing care and services to the community - and in particular staff the most costly item. There are limits to efficiency and the prime consequence was the diversion of funds from care to profit.
The big health care chains like Tenet/NME (in the late 1980s and again in the early 2000s) and Columbia/HCA realised that they could use the same strategies Califano advocates for doctors to increase unnecessary services and so profits. Both later pleaded guilty to paying kickbacks.
There has been increasing evidence of higher costs, poorer community services, more complications and even increased mortality in for profit systems than in not for profit ones. This is most obvious in aged care.
p26 The most important lesson from the Chrysler experience is not that $58 million was saved in 1984. The gospel lesson is that hard-negotiating buyers, who treat health care like any other products they purchase, can change the system -- and we are only beginning to realize the benefits of competition.
That health can be specified as a commodity is another unchallenged dictum. That the well-being of the frail, old, sick and vulnerable can become an impersonal abstraction to be haggled over by " hard-negotiating buyers" intent on maximising profits is bizarre. The value systems and cultural ambience are incompatible. In a humane and civil society this is macabre - yet this is what market rhetoric has sold to the public.
p27 Chrysler and other auto companies have tried to convince the UAW (Union of Automotive Workers) that competitive delivery systems can give their members the same full range of benefits they have today. Chrysler and other employers can negotiate agreements with efficient doctors, hospitals and other health care providers, either directly or through a number of organizations, to deliver quality health services at prearranged lower prices.
Negotiation is all about market power. The groups who have this power are the corporate manufacturers, the corporate insurers and the corporate providers. In an impersonal competitive system based on power, health professionals and their patients are powerless so are screwed.
p31 I have recounted the Chrysler story here because I have lived it. The experience has led me to develop an enormous respect for the genius of American business and a competitive private sector. I have watched businesses grapple with this problem with imagination and determination and freedom to act, not inhibited, as government often is, by politics and the power of special interest groups. Indeed, business is key to solving the health care cost crisis in America.
In the last 18 years the free market system Califano advocates and the genius of the American businessmen in whom Califano has so much faith has been devoted to circumventing the system in order to make money for shareholders rather than to care for patients. The conduct of for profit providers like Tenet/NME and Columbia/HCA, of HMOs like Aetna and Kaiser, and of aged care chains like Sun Healthcare, Vencor, IHS and Beverly Healthcare show how misplaced his faith in business managers was.
Doctors who have participated in the rape of Medicare and the misuse of patients for profit have been rewarded for complying. Their contracts have been terminated when they objected. Without doctors who became team players and without doctors who were willing to turn a blind eye, most of the fraud, many of the failures in care and the bulk of the massive profits would not have eventuated.
p59 Health care costs are a large part of the reason why American steel can't compete with foreign steel. The United States spent $1580 per person on health care in 1984 -- far more than the next highest outlay, West Germany's $900 per person, three times more than Japan's $500, and four times Great Britain's $400. Yet in each of those nations, health care is sophisticated and modern. Life expectancy is just as high as in the United States and infant mortality is lower.
None of these countries used a market driven system to keep their costs down. Those of us who oppose market medicine use these same figures to illustrate the consequences of market medicine and argue against it. Califano's use of them to support his arguments for more market pressures is disingenuous and not logical.
p63 Any industry that gobbles up more than 10 percent of our gross national product will spawn its share of parasites and hangers on. -- ---- No state legislature can get through a session without being besieged by lobbyists representing doctors, hospitals, health insurers, and public interest groups. In Washington, D.C., the worlds mecca for such labours, no less than 300 organisations lobby the Congress, the executive branch, and each other on health care issues. ----- magazines and scholarly and trade journals ----- books on health care ---- analysts and investment bankers ------ thousands of accountants and attorneys who help them; thousands more who make their living interpreting and manipulating Medicare regulations ----- still other thousands of attorneys who spend their careers suing or defending hospitals, drug companies, and doctors at the medical malpractice bar. The pots of gold on the fringes of the health industry rainbow are real. Large numbers of American businesses are mining their share, and those who aren't have begun their prospecting.
They are all siphoning off profits from scarce funds which were paid to insurers or in taxes to provide care. Califano's revolution and his solutions have not changed this. In fact the application of his "hard-negotiating" market principles has made it much worse. This is what you would expect if market principles were the cause of the problem in the first place
p64 Far more troubling than the size of the health care industry is its inefficiency and lack of discipline, which have provided a breeding ground for waste and abuse. --------- The study concluded that 19 percent of all admissions were unnecessary or premature, and that 27 percent of the hospital days were completely inappropriate.
Has this changed - look at Tenet Healthcare in 1991 and again in 2002- and add to that managed care which denies care to thousands who are entitled to it. (see http://www.healthcoalition.ca/linda.html)
p65 But the health care system is so undisciplined and susceptible to fraud and abuse that the federal government finds thousands of examples every year, In 1984 federal and state investigators successfully prosecuted 500 health care providers and suppliers, kicked out of Medicare and Medicaid 350, and saved taxpayers more than half a billion dollars.
As market pressures have increased so have the frauds, from a "largest ever" fine of only US $500,000 in New Jersey in 1990 (NME), to US $10 million in Texas in 1991 (NME), to US $379 million in 1994 (NME), several hundred millions in the labscam frauds, then the aged care frauds, the pharmacology frauds and finally the US $1.7 billion fraud by Columbia HCA. Not to mention the problems in managed care. No one knows what Tenet/NME will pay to settle the Medicare rorts exposed in 2002, or what fines will be levied in the US $4 billion HealthSouth fraud. None of these really big fraudsters have been kicked out of Medicare and Medicaid. What a difference 18 years of ever increasing market pressure has made.
p66 While the United States spent $1580 for each man's, woman's and child's health care in 1984, Singapore spent less than $200. Yet both countries have the same rate of life expectancy at birth, and Singapore's appears to be rising rapidly.
Tenet/NME entered Singapore in 1985. How things changed!
p67 There are signs that our awakening to these problems can lead to results, particularly in the gold-plated hospital sector. But transforming the American way of health is no task for the timid. It will demand imagination, persistence, and courage. One critical challenge is to convince the doctors that we are serious about making fundamental changes in the system, to make it clear to them that we want results.
And so they have - with 18 years of imagination, persistence, and courage they have beaten the doctors into submission and secured the economic results required to please the marketplace. Care has suffered, fraud is endemic and costs have risen.
p95 It's hard to change the health care system without them (doctors) --- as most of us who have tried have learned.
We're coming to appreciate that, like most Americans, doctors will respond to financial incentives far more readily than they will accept regulation. We can change the economic bait for our physicians. In a time shorter than most Americans think possible, that will change the way doctors practice medicine.
How right he was in the USA and how successful they were! Between 1996 and 2000 in Australia health minister Wooldridge, health insurer AXA, and Mayne executive Catchlove tried unsuccessfully to induce doctors to relinquish their autonomy and control of care by entering into contracts. In 2000 Peter Smedley took over from Catchlove at Mayne Nickless. He tried to make changes which compromised care without the doctors' support and this had disastrous consequences for Mayne Nickless. It cost doctors nothing to take their patients elsewhere.
The market had some success in corporatising General practice in Australia but this has not been profitable for them.
In 2003 Mayne sold all their hospitals to a consortium dominated by a Citigroup subsidiary. Citigroup acts for and advises many of the large US Healthcare corporations. It is linked with the HealthSouth fraud. It is likely that they will try to gain the support of doctors by boosting their careers and incomes, the tactic that has been so financially successful in the USA.
p112 The fastest-growing hospitals have been those run for a profit. There are about 1,100 for profit community and special purpose hospitals. For profit community hospitals grew from 775 with 70.000 beds in 1974 to 816 with 125,000 beds in 1984. ---- ----
The most striking for-profit expansion has been the growth, largely by acquisition of multi-hospital corporate chains.
In the last 18 years the corporate giants have expanded and consolidated by mergers and acquisitions. Those who failed to adopt aggressive profit first health care practices have gone under. Nonprofit groups and teaching hospitals which have tried to maintain high standard ethical care have come under extreme pressure. Vast numbers have been purchased by the corporate giants Tenet/NME and Columbia/HCA. Local communities have become alarmed at the consequences of bare knuckled competition for care and for services to their communities. Attorney Generals, and legislators were forced to step in to protect patients from financial exploitation and to stop the total destruction of the community centred not for profit US health system.
p113 The four largest hospital chains, Hospital Corporation of America (HCA), Humana, American Medical International (AMI), and National Medical Enterprises (NME), together owned 435 hospitals - - - , controlled more than half the for profit beds, and had revenues of more than $10 billion in 1984. ------
For-profit chains tend to be diversified, particularly within the health industry. National Medical Enterprises (renamed Tenet Healthcare in 1994) owns 286 nursing homes and leases 21 more. It distributes hospital supplies, operates retail pharmacies, and sells building materials.
The original HCA and Humana have gone. They were absorbed into Columbia/HCA (now once again renamed HCA) where HCA's fraudulent practices were exposed in a fraud scandal settled for US $1.7 billion.
NME built a vast empire by imprisoning children, providing unnecessary care, and by defrauding the system. It was rewarded by the market for its success in successfully negotiating a US $379 million guilty plea in 1994. It paid only the value of a few hospitals and stayed in business. It gave itself a new name Tenet Healthcare indicating that this reflected its new value systems.
The banks and the market gave Tenet the funds to take over AMI and then OrNda Healthcare. It rapidly became the second largest health care giant in the USA. The close integrity restraints imposed in 1994 were lifted in 1999. Tenet immediately reverted to its past practices. In 2002 it was once more embroiled in a massive scandal involving unnecessary surgery, allegations of paying kickbacks to doctors and of further Medicare fraud.
Tenet/NME spun off its aged care nursing homes as Hillhaven in 1989. This company had absorbed NME's successful marketplace strategies. These were carried by its trained executives into Sun Healthcare, Horizon Healthcare (and also here -- here and in several extracts here too), Vencor and Integrated Health Services. In each of these patient care was compromised and the surviving entities blew up in the late 1990 scandals and frauds.
Are these the courageous businessmen whom Califano believed would reform the health system in the interests of patients and lower costs?
p114 The study concluded that charges in for-profit hospitals were 6 to 58 percent higher than in non profit hospitals of similar size. Three of four non-profit hospitals sold to for-profit corporations raised their charges immediately after sale. One increased charges 113 percent in the first two years.
p115 The most troubling concerns stem from the danger that the profit motive -- and the legal obligation to produce for stockholders --- will undermine professional standards and reduce concern for social and individual problems. The debate over the role and regulation of for-profit hospitals is likely to intensify. They have been accused of --------
Califano recognises and describes some of the problems in the for profit system. He does understand the consequences of strong corporate competition in the health care sector, yet he persists in his claim that the solution is more of the same. If something is wrong in the market then it is because it is not sufficiently market like - never because market ideology is flawed.
Vertical mergers of hospitals with suppliers harbor the potential for serious conflicts of interest that could unnecessarily increase the risk and cost to the patient. As for-profit hospitals join hands with corporations who are inventing and selling expensive medical devices, can they keep the focus on both profit and patient at the same time? Should a corporation that owns hospitals, psychiatric units, hospices, and/or home health care operations be allowed to own drug companies and medical equipment manufacturers? Or should such vertical integration be curtailed because of the conflicts it creates.
During the last 18 years vertical and horizontal integration became the buzzwords for corporate medicine in the USA and Australia. No one remembered Califano's warnings and the questions he asked. Integration and diversification became new unchallenged prescriptions for success. Corporate donations and political lobbying ensured that any existing restraints were removed.
This myth was responsible for a frenzy of mergers and takeovers - a frenzy fueled by the giant financial institutions which found it very profitable.
In theory integration should produce a more coordinated and efficient service. Outside the marketplace it can and does work. In the marketplace integration and diversification has provided endless opportunities for corporate giants to use their financial muscle to dominate and control the market; and then exploit this market for profit. There are enhanced opportunities for forming relationships with doctors and for cost shifting. For corporations it has opened up the pot of gold. There have been many claims that the patients are short changed on the services they receive. For profits have used Califano's insights to enlist the support of the doctors.
p116 There is a deep concern that profit-making hospital and health care providers will keep their eyes fixed on profits -- providing services that give the highest return, encouraging tests or services of high profit margin, directing patient to related suppliers, like pharmacies, eyeglass shops, or nursing homes, even if these are more expensive than other suppliers. ------- Are they (such practices) acceptable in the health care arena.
Califano asked the right questions but because he applied an illogical solution what he feared is exactly what happened.
p117 On October 1, 1983 -------- Medicare adopted a prospective payment system for hospitals (i.e. Diagnoses Related Units or DRG's) ----
----- If a hospital spends more on a Medicare patient than the DRG rate, it loses money. However, if it spends less than the DRG rate, it makes money. Thus the hospital's incentives are reversed. No longer does Medicare pay more for more services or pick up the bill on a cost plus basis.
The genius of the marketplace would soon find ways around the limits imposed by these economic levers. Tenet/NME achieved enormous success by diversifying into areas where there were no DRG's such as psychiatry, creating a market and then exploiting it to its limits. Columbia/HCA succeeded over competitors by working the DRG system to the extent that they paid US $1.7 billion in fraud settlements, a sum many feel was inadequate. Aged care chains built vast empires by moving into post-acute care where DRG's did not apply. In 1999 Tenet Healthcare found another loophole in the DRG system and ruthlessly exploited it. When there was an outcry they were indignant because they considered what they had done was legal. Morality has never been a marketplace attribute.
p121 To make up for lost business in admissions and lengths of stay, hospitals are aggressively soliciting doctors to get more patients. In California, Hollywood Community Hospital, part of a for profit chain, has offered to share its DRG payments with doctors when their patients bills are more than 75 percent reimbursed by Medicare. -----
How does this differ from an illegal kickback?
Hospitals are also diversifying. By 1984, 25 percent were providing home health care and another 35 percent planned to get into that business. ----
Hospitals have gone to Madison Avenue to help them develop new markets. In 1983 health care professionals, led by hospitals, spent $41 million on television spots, up more than eleven times from 1977's $3.7 million. In 1985 hospitals employed two thousands marketing executives, compared with six in 1978.
Califano's advocacy made kickbacks to doctors appear legitimate. Soon after Califano's book was published Tenet/NME started paying large sums to doctors and others for referring patients to their hospitals. Team players who cooperated in the exploitation of patients for profit were richly rewarded. Those who refused starved. NME adopted Califano's recommendation that doctors greed be used as the carrot to attain corporate objectives. The practices may even have been globalised. In Singapore NME was accused of pressuring a doctor into admitting more patients in return for a financially favourable rental contract.
Since 1986 marketing has become critical to corporate success. It was considered the single most important activity by both Tenet/NME and Columbia/HCA - more important than care. Columbia/HCA alone spent $100 million each year.
p122 Hospitals have also demonstrated repeatedly that they know how to pull the political strings to make the Medicare system work for them. Their original reluctant embrace of Medicare became a torrid affair as the hospital lobby tailored the system to their interests.
Will DRG's suffer the same fate? It's too soon to tell, but the limits of government regulation over an industry with the money and power of hospitals and doctors are clear.
Corporate political influence has grown and grown since 1986. The wealth, political muscle and lobbying strength of the corporations involved in health care has ensured that effective laws to protect the system and the rights of patients have not been passed. These would have curbed corporate profits.
p123 The test for us --- as employers, employees, insurers and most of all, citizens, consumers, and patients ---- is to give hospitals the right mix of rewards and penalties to motivate them to care about cost as well as service. Whether we're smart enough and tough enough to do that may well determine whether there is a first-class health care system for our children.
This is the essence of Califano's market solution. Its all about pressures of one sort or another. Cognition, the understandings which people develop, their motives, values and ethics are not linked to the solutions. The primary measures are economic and everything else is expected to follow. See more below. Successful corporations all found the right mix of rewards and penalties. Columbia/HCA (and see here and here too) and Tenet Healthcare led the way (see 1991 fraud, practices in 2000 and the 2003 scandal)
p124 For the first time in their history, the health insurers and the Blues (i.e. Blue Cross and Blue Shield) are being pressed hard to respond to the big customers who pay their bills -- the large corporate employers. It's none too soon.
p126 As with so much of the health care industry, the health insurance business is in turmoil. There has been competition among insurers for some time, but insurers are now vying with hospital chains and clinics, HMOs, and preferred providers that offer services (including claims administration) directly to big corporations, and with former big customers that self insure.
So much for the idea of "customer power". The big impersonal companies have become the customers. The market is between large powerful groups who can be seen as bartering for the use of profit bodies - i.e. patients.
p160 (Referring to the ideal competitive marketplace) That's not the way the health care system has worked. Because health care suppliers have not delivered in a competitive environment and the patient-buyers are not competing with each other, doctors and suppliers have been able to shift costs and charges from one patient to another.
Califano correctly identified the priority of profit over patient care as being fundamental to the dysfunction in the US health system and he also realised that the big for profit providers were a problem. His solution was to establish market forces that would drive costs down - essentially managed care.
The problem is that the solution Califano offered was simply more market, more competitors, and more competitive pressure. Solving problems arising from market pressures by increasing those pressures was not a logical solution.
The events of the last 18 years point to this lack of vision. An ever increasing spectrum of competing providers and HMOs have each needed profits to maintain viability and to fund the takeovers and mergers which were essential for survival. These profits could only come from the money provided for the care of the sick or from defrauding third party payers. As a consequence care was compromised and fraud became endemic and then epidemic.
p166 Its time to stop playing shell games. True reductions in costs will come only from fundamental changes in the way we deliver and pay for health care.
p167 There isn't much time left to get an efficient health care delivery system. The graying of America is forcing the issue, with a rapidly increasing number of older citizens demanding more and more care in expensive high-technology hospitals and nursing homes.
p178 the combination of the aging of our population, rising health care costs, and the shrinking proportion of actual workers is sobering and creates a financial and political crunch the likes of which our nation has never experienced.
Califano identifies an aging population as one of the pressing problem in health care in the USA and in Australia. He is enthusiastic about passing this problem to the business community. He expects businessmen bent on profits in a competitive marketplace to have the integrity to provide services to these vulnerable people who often can't pay. Eighteen years later the problem is unsolved and market protagonists still threaten us with it. Not much has changed. The hard fact is that other systems provide a less costly means of meeting this challenge and doing so while preserving equity.
p180 In Britain that decision (i.e. to keep patients alive with renal dialysis), though not stated explicitly, is clearly related to the age of the patient. For its citizens up to age forty-four, Britain provides the same level of treatment as France, West Germany and Italy do, but for patients forty-five through fifty four the rate slips to about two thirds. ---- those over sixty five are treated at less than one tenth the rate. In the United States, virtually everyone with chronic kidney failure is treated, mostly under Medicare.
That governments have regularly underfunded a less costly system of health care is an argument for more funding or against a government run health system. It not an argument for a market system in which equity is sacrificed and care is rationed for profit.
This is not to suggest that a properly funded National Health Service is the best solution. It is only one option. If there are insufficient funds then we must ask whether we should be rationing in order to secure the best and most equitable use of resources, or for the profit of shareholders. There are many ethical issues and the market has shown by its misconduct that it is not the right place to resolve them.
p181 The tap root of urgency goes to the morality and political civility of our society. Our failure as a people to confront and conquer the health care cost Goliath threatens all of us --- and particularly the elderly -- with a system of death control.
p183 I do believe that we can have an America without a completely institutionalised, government-legislated, and bureaucrat-operated system of death control. - -- - - - - - - - Our nation can well afford to provide quality medical care to all if we have the courage to act and the stamina and persistence to eliminate the profligacy of our health system in the face of potent economic special interests.
Well yes the USA once had a not for profit community centred health care system. A number of analysts claim that a single insurer as in Canada would save enough to fund care for everyone. Market advocates are particularly aggressive and negative about the not for profit system because it is the greatest threat to their future. Both Columbia/HCA and Sun Healthcare went on the attack.
A community based not for profit system might also go a long way to meeting the other problems created by the competitive market. Califano's solution has been to introduce new sets of competing business groups into the health arena, each with their own special interests - managed care. The greed of the market is to be controlled by creating a system which increases but balances one greed against another. In spite of 18 years of adverse consequences no establishment theorists have been prepared to look seriously at the failures which resulted or examine real alternatives.
p196 To a great degree, the American health care system is consumer driven. Doctors and hospitals give patients what they want under the circumstances they find themselves in. Patients want everything that might conceivably provide cure or relief of symptoms, whatever the cost, especially when they're not paying.
p198 The American patient must become an informed consumer. Central to a free market with few controls and a variety of payment systems for physicians, hospitals, and other supplies is an informed purchaser of medical services.
It is imperative to get lots of information out: what doctors charge, how successful they are in handling different types of patients, what diseases they treat most frequently, how often they use drugs or resort to hospitalization or surgery for particular diseases.
Informed citizens are highly desirable and make the best patients. There is in all these arguments a failure to address the possibility or impossibility of large sections of the population, mostly preoccupied with the pressures of modern life gaining enough knowledge of body function and disease process to become informed and effective consumers in a health care marketplace. The medical profession has its own difficulties in maintaining a useful grasp of all the complexities of disease processes.
There are many situations where the patient is disempowered and vulnerable because of illness, age or mental condition. The population is flooded with much unscientific and inaccurate information about health matters by the popular media. Can we replace the mutual trust and trustworthiness of the traditional doctor-patient relationship with suspicion, competition and market pressures, and expect this to work? This is not a defense of doctors conduct or practices.
p210 Our health insurance companies should reorient their targets of insurance. Medical services follow reimbursement dollars the way an alley cat hunts fish in the garbage. Our insurance patterns should be shifted, providing better coverage for preventive care and health promotion --- ---
Califano is right in his description of a health care marketplace but do we want to debase our human values further by institutionalising these alley cat motives as the driving force in a reform process. He claims that it is these unfortunate alley cat motives which have caused much of the problem. Will it address the underlying problems if we encourage the alley cat forces in our health system by using them to drive humanitarian endeavours? This is what he is suggesting in his solutions. Wouldn't it be better without the marketplace and the alley cats!
Once again Califano is targeting the individuals rather the system. I argue that it is the context created by the system which selects for the alley cats in society and encourages the expression of the alley cat in each of us.
p211 The profit motive cannot be permitted to short change quality of care or curtail access to needed medical services. Special precautions are needed as the big-money men move into the health care system in large, integrated corporate structures. The rise of for profit hospital chains, and their ventures of vertical integration with suppliers of medical products, can't be viewed only in an economic dimension.
Unfortunately this is what Califano's solutions which are based on incentives do. In the 18 years since his book the health care revolution which Califano advocates has short changed quality of care and curtailed access to care. The alley cats control the system and make the rules.
The unique nature of health care requires that high ethical and medical standards be set. Corporate and government purchasers of care can use their leverage to protect their patients, but the introduction of the profit motive requires a special vigilance. Big business brings its own set of values to the hospital bedside and the doctor patient relationship. We must adopt rules for the profiteers to live by as they take over more of the health industry, so that our nation can get the most of their efficiency, maintain the highest professional standards, and ensure that they take their fair share of Medicaid and poor patients. Devising such rules deserves top priority of medical societies, federal, state, and local government, and each of us as citizens.
Well yes but with such diametrical opposed value systems only one set could triumph and the market had all the power. Big business made its own rules.
Doctors have worked within ethical rules which protect patients from exploitation for profit for over two thousand years. Most still commence their medical careers with humanitarian objectives and a commitment of service to others. They are subsequently subjected to the pressures of the modern materialist world, the modern medical marketplace and powerful, credible and persuasive businessmen.
All this pressure has severely dented and eroded the profession's ethical structures. Financial pressures have contributed to many of the ethical problems in the USA.
Businessmen and managers in contrast are trained to maximise profits and their allegiance is to personal gain and to shareholders profits. They enter the business work force and train to be managers in order to make money and consequently respond primarily to financial incentives. The ethical structures which once governed individual business dealings have been overtaken by corporatisation.
Academic businessmen such as Friedman have developed rationalised patterns of thought which justify the practice of encouraging greed by linking personal rewards to profits. Legality and not morality are seen as the only legitimate restraints. Corporate managers are trained to serve the corporate profit interest and place this ahead of any social responsibility to the community. They do now make claims to social responsibility but their actions show that this is not even skin deep.
These are the people whom Califano believes will reform health care in the interests of the patient. In the 18 years since his book these businessmen have laid down their own sets of rules. They have shown how well they were trained and how avaricious they can become.
p212 Providers of health care, scrambling in this newly sophisticated and tough-minded market, are reorganising rapidly to compete for the health care dollars of business and government. The financing and the delivery of health care are becoming integrated, led by the for profit chains. Emerging health care conglomerates hope to create a guaranteed clientele for their hospital beds and at the same time control costs and utilization. These new health conglomerates enjoy a number of competitive advantages over the single purpose hospital or insurance companies. As insurance companies, they have much greater leverage on the claims they will face because they control the providers. --- their own hospitals and clinics. As hospitals and clinics they can operate at efficient capacities by providing incentives in their insurance plans to encourage patients to go to them.
In the last 18 years this competitive advantage has enabled the aggressive corporate giants to dominate the health sector and to impose their own set of value systems on it. While making elaborate claims to service and to ethical structures these businessmen consider the medical ethic of care and the doctor-patient relationship of trust to be obsolete. Groups attempting to genuinely serve the medical ethic of care have not survived in an environment where aggression and competition rather than compassion and cooperation determines outcome.
p213 Whether the trend towards consolidation will result, as some have predicted, in ten to fifteen corporations delivering most medical care in the United States, it is clear that bare-knuckled competition will increase and that a significant degree of consolidation is likely. As a nation, we will pay dearly if we do not get the rules of the road in place to oblige the new conglomerates -- for profit and nonprofit alike -- to respect the special nature of health care and to provide quality care to all Americans.
The rules were there but they were disregarded. Those charged with enforcing them were ineffective. This was because of corporate power and influence.
p216 Changes in state laws relating to physician monopolization of medicine and malpractice are keys to putting an end to medical featherbedding.
p217 My own experience leads me to conclude that lasting solutions to cost problems do not lie in wage and price controls on doctors, hospitals and other providers. They will be found in changing the market incentives --- how doctors and hospitals are paid, and how patients get their bills paid.
This is the modern managerial solution. While these businessmen blame the medical profession for being greedy and making too much money they reward their managers with multimillion dollar salaries and even larger incentive bonuses based on profit performance and not care. We must ask whether this policy will foster dedication and caring health professionals?
p219 Government actions can have far-reaching influence on the shape of the health care revolution. But the economic stakes are so high, the entrenched interests so powerful, and money has become such an integral and sinister element of legislative politics that we should place our bets for innovative and imaginative solutions more heavily on the private sector than on federal or state government.
p220 Big business can put pressure on doctors and hospitals to reform without the political inhibitions that have made it so difficult for government to act effectively. Corporate managers don't need political contributions from medical and hospital associations. Rather the doctors, dentists, and hospitals need the paying customers of American medicine. The difference shows in the speed of change when top executives decide to move on health care costs, in contrast to the erratic pace of government actions.
Aroused American businessmen are the critical catalysts we need to provide a variety of effective answers to the problems of escalating health care costs. Their actions in the 1980's indicate that even the Rip Van Winkles with the longest beards are waking up to the heavy price of health care and moving to free themselves from costs over which they have little control.
They have shown a remarkable ability to influence the political process in their interests and to the disadvantage of the patients and those in the health system who actually provide care.
p221 In short the genius of American business is critical in shaping the American Health care revolution. Business can provide the financial incentives to which we know the hospitals and doctors will respond.
The genius of the American businessmen in pursuing profits is undoubted. The success of Eamer (NME), Scott and Frist (Columbia/HCA), Turner, Lunsford, Elkins and Scrushy and many others in defrauding or exploiting the US health scene for profit is undoubted. What is clear is that this has not been in the interests of US citizens or of the US health system.
Califano's blind faith in the marketplace and his distrust of the democratic processes is a forerunner to Andrew Turner's eccentric views. As Churchill remarked democracy is a poor (and inefficient) form of government but it is the best we have. Health care has suffered because powerful market groups have successfully subverted the will of the people at the expense of the democratic process.
p222 We don't need a national health plan to make adequate health care a right, available to every American. We need to get costs under control, and we need an imaginative and aggressive private sector, a government that stops playing a shell game with health care costs, and a people with the compassion to take care of the poor, the old, and the unemployed.
p223 Yet it is corporate America's aggressive pursuit of lower-cost quality health care that holds the best hope of getting the system to the level of efficiency needed to provide care for all at a reasonable cost. Social justice requires us to provide health care to the poor, the elderly and the unemployed.
p224 But government alone can't achieve these goals. The private sector should lead this effort, and everyone must join in if it is to work.
p225 The central fact about health care and costs in America is that we can do something about them. -- - - - - - - We can shape a competitive system of excellence, and motivate doctors and hospitals to provide less expensive care and patients to stay healthy. We have the moral depth and Judeo-Christian base to face the bewildering ethical issues our scientists pose with their ingenious biomedical and technological inventions and manipulations.
The market did take over. While government vacillated and debated the market imposed its own health care solutions. The web pages on this site describe the consequences of concerted efforts over the last 18 years to make this anachronism work. Bringing in the Killer Wales to control the sharks was never going to work.
I do not want to dispute Califano's overall analysis of the adverse impact of financial forces on the US health care system although there are issues that one can question. The point is that most of the problems arose because health was increasingly considered a marketplace activity. As a consequence commercial practices which were once considered unethical were made legitimate. Sensitive areas of human activity which were protected from the market because they were sacrosanct for good reasons were reduced to the status of bars of soap. The lessons of history were ignored. The problem was the permeation and universalisation of a particular brand of market thinking into the community and into health care.
Califano's fundamental mistake is that he
mis-specifies health care as a commodity to be traded competitively.
He responds to the problems by attempting to use marketplace
remedies. Not unexpectedly the experience of 18 years shows that this
has served only to compound the problems.
I support the argument that health care is primarily a cooperative and empathic community exercise. It is a commitment by individuals supported by the community to the welfare of themselves and others - something called the common good. It should be organised as such by the community.
Motivated health professionals play an important part as members of that community. Health cannot simply be delegated to government, to the market or to doctors although all play a role in supporting society.
Economic considerations are important but they are supportive and limiting rather than defining. The way in which health care is funded is less important than the way in which the available funding is utilised to maximise health benefits within the limits imposed by the funding.
My own examination of the corporatised US
health system indicates that the dominance of profit in determining
care is responsible for the major adverse impact which corporate
businessmen have had on both the high cost and the standard of care.
Califano's lack of knowledge of the actual nature of medical practice
is understandable but unfortunate. What is important is to understand
that Califano's limited view sounds credible and is widely held by
politicians and businessmen even today.
Most disturbing are Califano's solutions and the fact that these are widely accepted by economic rationalists which means by most businessmen and politicians in the majority of Westernised countries. Califano knows that a greedy pursuit of profits has been dysfunctional for care and for the US health system. This situation he claims cannot be permitted. He is critical of the large numbers of groups who parasitise the health system to make profits. The solution he proposes is simply to increase the commercial pressures and to increase the numbers of people competing to wring profits from the system. This is a remarkable feat of illogicality.
Robert Kuttner puts this very nicely. He asserts that "much of the economics profession, after an era of embracing a managed form of capitalism, has also reverted to a new fundamentalism about the virtues of markets. So there is today a stunning imbalance of ideology, conviction, and institutional armor between right and left." Kuttner maintains that there is at the core of the celebration of markets a relentless tautology. If everything is a market and market principles are universal then if anything is wrong it "must be insufficiently market like. This is a no-fail system for guaranteeing that theory trumps evidence." and "It does not occur that the theory mis-specifies human behavior." He asserts that "real people also have civic and social selves." (Kuttner R "The Limits of Markets" The American Prospect No 31 Mar-Apr 1997: p 28-41)
Health care is an area where civic and social considerations are preeminent. The health professions have recognised for centuries that the motives driving the care of patients are frequently in conflict with the personal profit motive. The consequences of giving the profit motive dominance in health care has become only too apparent in the US health care revolution over the last 18 years. Criminal conduct, fraud, aggression, misuse and abuse of patients, falling standards and denial of care have been the dominant features of Califano's revolution.
Califano's solution to greedy providers of health care has been to bring in more greedy groups who make their profits by using gatekeepers to guard the insurance dollar and deny care. They take their profits off the top. The providers devise ever more ingenious ways of extracting money from the gate keepers and squeezing more profits from the money by providing less care. Their managers are given massive incentive bonuses when they succeed. The consequence is that health professionals who do the best for their patients are penalised for doing so. Patients are short changed all the way to the bank.
Even that mouthpiece of the US health care marketplace, Modern Healthcare, accepts that commercial forces have been dysfunctional for health care. I quote "It is wise to keep in mind that while market forces may create economic efficiencies, they have never been known to guarantee sound ethical values. Distance between money and medicine is a prudent thing to create and protect." (Modern Healthcare editorial 28 July 1997)
I do not want to prescribe a solution to the problems which we are now faced with in the USA and Australia. There is a spectrum of alternatives.
We should directly address the nature of the problems and the first step is to clearly define the nature of health care. Is it a community function or a commodity we can package and market? Is the care of the frail, the sick and the suffering something we compete aggressively for or is it something which binds us in empathy and community effort. The answers an informed community would give to this are obvious and these are the answers Romanow got from Canadian citizens when he took these questions to them.
Once these questions are answered then the essential nature of a health system based on them becomes clear. How we think about something has a profound impact on how we behave. It is the way we understand what we are doing which is critical to a functioning society. It is our capacity to reflect on our situation and motivate ourselves which drives our activities from within - in contrast to incentives or economic outcomes which all to often push us along unwelcome paths.
I would like to suggest that humanitarian services are not the domain of the marketplace. The ethics, values and cultural ambience of the marketplace are inappropriate to the context of health care. The marketplace paradigms of interpretation are wrong and are the underlying cause of many of the problems.
The Romanow Royal Commission <http://www.healthcarecommission.ca> in Canada reached similar conclusions in its report "Building on Values: The future of health care in Canada". I summarised these particular findings in a paper published in Health Issues in March 2003.
Download article from Health Issues
Journal March 2003
If market pressures are at the root of the problem then increasing competitive market pressures and economic levers is not a logical solution. The logical solution is to shield health care from the market and drive it with humanitarian rather than profit motives. If we don't have enough money decisions about rationing and quality of life must be made logically and empathetically. They cannot be left to the discretion of profit hungry business managers.
Profit hungry groups should be eliminated or reduced to a minimum. Health care providers should deal directly with the potential users of the health system and their representatives to develop a series of services which stretch the funds which the community is prepared to spend on health to get the maximum benefit from them.
As the 18 years of experience in the US marketplace shows other participants are parasitic and their main interest is in securing funds which would otherwise be directed to patient care. They increase costs and reduce care.
There are many ways of paying for health care and there are many ways of providing the services. We should choose the simplest and the most direct. Indirect levers economic or social should be banned. There will be less to go wrong and it will be more obvious when it does. More important than the actual solutions is the transparent logic which determines how this will be done.
I am not suggesting a nationalised health system although that is preferable to an unfettered free market in health. I am suggesting that unregulated bare knuckled competition by aggressive corporations looking for profits for shareholders on a steeply sloping "level playing field" is disastrous for humanitarian endeavours such as health care. Only those blinded by ideology can support this.
I do not want to paint myself into an alternate ideological corner but the sort of solutions that we should be looking at can perhaps be broadly characterised as "managed community cooperation". There are some, even in the USA who are now thinking along these lines.