Health Reform: The End of the American Revolution?


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The health industry must offer competitive wages if it is to be able to attract the quantity and quality of labor it needs. If changes in productivity and input prices did not and in my opinion cannot contribute much to a slowing of health care expenditures, that leaves the third term, quantity of services, as the only significant mechanism through which costs can be contained. Sooner or later the only way to cut health care spending significantly is to reduce the quantity of services delivered to patients.

Exhibit 4 suggests that recent cost-containment efforts did have a major impact on the quantity of hospital care delivered to Medicare beneficiaries. The number of bills a good index of number of admissions declined in the s instead of rising rapidly as in the late s; average length-of-stay decreased more dramatically than before; and the number of days of care stopped rising and then fell rapidly. Total charges deflated continued to rise, but at a much lower rate than before The rate of increase in charges per bill was relatively unchanged, but reimbursement per bill rose 1 percent per year faster after , contributing to better profit rates for hospitals under PPS.

Source: Social Security Bulletin September , p. With respect to the population under age sixty-five, the growth of participation in HMOs from 5 percent to 12 percent of the population also must have had an appreciable effect on hospital use. HMO members typically use only about two-thirds as much hospital care as the rest of the population; thus the shift in proportions would explain a decrease in hospitalization of 0.

It seems clear that the cost-containment efforts did have an impact on hospital services, not only for the Medicare population but for patients under sixty-five as well. For the total U. Virtually all of the decline occurred after Average length-of-stay was dropping prior to , but the rate of decline accelerated after that date. Hospital expenditures did respond to the shift to HMOs, the changes in reimbursement methods, the closer scrutiny of hospital admissions and lengths-of-stay by third-party payers, and a slight increase in the proportion of hospital bills paid directly by patients, from 7.

Cost containment has yet to make an impact on physicians' services.

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The number of bills for Medicare beneficiaries grew somewhat more slowly after than in the s, but the growth rate for allowed charges continued at almost 8 percent per year, deflated Exhibit 5. Reimbursement in relation to allowed charges was less favorable in than in , especially for physicians providing medical as distinct from surgical care.

This undoubtedly contributed to physicians' sense of unease. For the population as a whole, there is uncertainty about the trend in number of visits to physicians. The National Health Interview Survey shows an increase from 4. Some observers expected an increase in deductibles and coinsurance to slow spending for physicians' services, but no slowing is evident.

One likely explanation is that the proportion of physicians' spending paid directly by patients did not increase between and ; it actually fell from 30 to 28 percent. The failure of cost-containment efforts in the s to have much effect on expenditures does not come as much of a surprise to those who emphasize supply factors—hospitals, physicians, and technology—as major influences on costs.

In , a huge hospital capacity was already in place, and fewer patient days do not translate into equivalent reductions in costs until hospitals actually close. The data from Feder and colleagues indicate that costs per patient day in current dollars jumped A large physician supply also was in place in , and continued to increase after that date. It takes at least a decade for changes in demand to affect the flow of new physicians into the market, and even longer for changes in the flow to have a significant effect on the size of the total stock and its distribution among specialties.

Fees for specialty care and the number of specialists have, as yet, been relatively untouched. Consider ophthalmological surgery, for example. My discussions with physicians in San Diego County led to the conclusion that there are at least four times as many ophthalmologists practicing there as are needed to meet the surgical needs of the community at current rates of utilization. Nevertheless, fees remain high and new medical school graduates continue to flood into ophthalmology. Most of them, of course, do not make that much, but there is large excess capacity for surgery, for which the community pays a high cost.

The failure of fees to fall to a level that would eliminate the excess capacity while still providing a fair return to physicians with reasonably full workloads indicates that this market is far from the one envisaged by economists when they talk about competition.

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In addition to numbers of physicians, a major factor affecting costs is the pace and character of technologic change. In our pluralistic, heavily insured, malpractice-sensitive system, once a new technology is in place it tends to be used. Over the long run, technology, more than anything else, drives the cost of care. The technologic innovations that were introduced during the first half of the s were mostly developed prior to the cost-containment efforts. It takes a long time to slow the pace of innovation.

Unless this happens, however, other cost-containment efforts tend to have only a one-time effect. In the long run, changes in the rate, or at least the character, of technologic innovation must play a critical role in slowing the rate of growth of health care expenditures. Technologic change depends in part on new scientific knowledge, but it also is affected by demand.

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The old cost-based reimbursement system tended to encourage any innovation that promised to improve the quality of care, regardless of cost. Manufacturers of drugs, equipment, and supplies contemplating investment in the development of such innovations did not have to worry about whether the prospective improvement was worth the increase in cost. This pressure probably will slow the overall rate of innovation and will shift the emphasis away from improving quality regardless of cost to innovations that are valued primarily for their cost-saving potential. Moreover, there is an important distinction between potential technology that is, knowledge of available technology and technology actually in place.

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Potential technology is presumably the same in Great Britain as it is in the United States, but British physicians practice medicine at lower cost than American physicians, in large part because many technologic innovations are not available to them. Thus, it was unreasonable to expect the cost-containment efforts of the s to have any marked effect on health care spending within just a few years.

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To slow spending, it is necessary to slow the rate of growth of services; there is little possibility for big savings either in productivity gains in the narrow sense or in depressing the prices of inputs. The demand for services by patients can be affected by deductibles and coinsurance, but it seems unlikely that third-party payment will not always predominate.

The major constraints on services, therefore, must come from the supply side: the number of physicians, their specialty distribution, their training, the incentives they face, and, most importantly, the facilities and technology at their disposal. Changes in these factors can come only with a long lag, but they probably will come if the large buyers of health care maintain and extend their cost-conscious behavior.

The cost-containment efforts did not slow the overall rate of growth of spending for health care but probably did affect the distribution of care. Between and , the days of hospital care per 1, population declined more rapidly for the poor than for the nonpoor in both absolute and percentage terms. Similar disparities occurred in trends for blacks compared to whites, and females compared to males.

National Health Interview Survey data show the percentage of persons without any health insurance coverage rising from 11 percent in to They are inevitable if one seeks to eliminate cross-subsidization and to make patients more cost-conscious in their use of care.


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In the absence of third-party payment, each patient would make his or her own calculations of marginal benefit versus marginal cost. The result would be different standards of care for different people because, other things equal, the trade-offs would depend on income. In the absence of cross-subsidies for insurance, the poor and the sick will decrease their purchases of insurance and use of medical care.

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Critics of a single standard of care are correct in asserting that some people get more care than they want in the sense that they would rather use the resources for something else while some get less than they would want. However, the egalitarian approach can be justified for its symbolic value, or because it contributes to political stability, or because the wealthy do not want to redistribute money to the poor for them to use as they choose but are willing if the money is used for health care.

Dissatisfaction with the cost-containment effort is mounting. Critics say that it is not stemming the growth of expenditures, it is leaving more individuals with little or no insurance, and it is making life difficult and uncertain for the manufacturers of drugs, equipment, and other health care supplies. Some critics allege a decline in the quality of care, but the evidence offered is largely anecdotal.

Physicians blame cost containment for forcing them into new modes of practice and for their loss of power to managers and administrators. Some reorganization and loss of power was inevitable, but where physicians have taken the leadership in efforts to control costs as in the prepaid group practices there is greater potential to retain professional satisfaction than when controls on utilization are imposed from the outside. A counterrevolution in health care finance is brewing, based on dissatisfaction and fear among many different elements.

Efforts to improve the current situation should be encouraged, but they should be based on realistic assessments of what has happened and what is possible. The failure of health spending to slow in the s probably reflects the recency of the cost-containment efforts more than inherent ineffectiveness. Indeed, there has been a demonstrable impact on hospital utilization, which was the primary target.

Most importantly, any attempt to build a better system for providing health insurance and controlling health care must recognize certain fundamental problems. On the demand side, most people do not want to risk having to pay very large bills, so they seek health insurance, either privately or through government programs. Once individuals have insurance, however, they want to consume more medical care than they would consume without it—and more than is socially optimal.

Another difficult policy problem is deciding when the premiums people pay for health insurance should be based on their expected utilization and when they should not. Most Americans seem to feel comfortable about having cigarette smokers pay higher premiums than nonsmokers, but even enthusiastic advocates of experience rating are uneasy about requiring individuals born with genetic defects to pay above-normal premiums.

Where to draw the line? Is alcoholism, for instance, to be regarded as similar to cigarette smoking, or is it more analogous to a genetic disease?

Health Reform: The End of the American Revolution? Health Reform: The End of the American Revolution?
Health Reform: The End of the American Revolution? Health Reform: The End of the American Revolution?
Health Reform: The End of the American Revolution? Health Reform: The End of the American Revolution?
Health Reform: The End of the American Revolution? Health Reform: The End of the American Revolution?
Health Reform: The End of the American Revolution? Health Reform: The End of the American Revolution?
Health Reform: The End of the American Revolution? Health Reform: The End of the American Revolution?

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