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The Market Prevails in Healthcare

March 1, 1997

Judith Zwolak

It really is the year of the market in healthcare," said Steven Schroeder at the annual Leo S. Weil lecture held at the Tulane School of Medicine on Jan. 27. Schroeder, president of the Robert Wood Johnson Foundation, the nation's largest philanthropic organization devoted exclusively to health and healthcare, offered a lecture entitled, "The triumph of the market: Its meaning for healthcare."

In it, he described the emergence of managed care as the market-driven response to what many perceive as a bloated healthcare system with skyrocketing costs and misplaced incentives for physicians. Change in the healthcare market was largely driven by soaring costs, Schroeder said. The percentage of the Gross Domestic Product (GDP) spent on healthcare in 1940 was 4 percent; in 1995, 14.2 percent of the GDP went toward healthcare services. "Every other country is in the single digits," he added.

In comparison, education accounts for about 7 percent of the GDP and public spending on defense is at 3 percent. A second concern of many economists, Schroeder said, was that "fee-for-service medicine" was not a sensible way to do business. "Doctors had the wrong incentives that encouraged them to do more and more," he said. Schroeder also credits an excess capacity of healthcare providers and a bloated healthcare infrastructure for moving the industry toward managed care.

Moreover, the Clinton health plan, although it failed, "cloaked healthcare reform in the language of the market," he said. "It gave Wall Street a signal that the left, which previously had opposed the commercialization of medicine, saw it as a way to go forward. That was a tremendous boost to for-profit firms and entrepreneurism in general."

The market's answer to these issues was the growth in managed care, a system in which healthcare procedures are closely governed to decrease costs. The most visible part of managed care, said Schroeder, is the HMO [health maintenance organization], which he views as having taken it on the chin in the media. "From what you read in the press, you would think that managed care is an unmitigated disaster. But in fact there are a number of advantages."

Schroeder sees that one advantage is the possible increase in coverage of preventive measures. Once the market consolidates and people stay with one HMO over a significant period of time, he said, companies will see a positive financial return on prevention activities. "[Managed care], of course, also curbs the fee-for-service incentive to do more," he said. "It's also an efficient way to clear excess capacity in the system."

In the last 11 years, about 600 hospitals closed in this country with a loss of about 300,000 hospital beds, he said. The market also clears what Schroeder calls an "excess supply" of doctors. "As a physician myself with two kids in medical school, I don't like to think of doctors as excess supply," he said, "but, in fact, a lot of smart analysts have proved that we have a major excess of positions--about one-third of the total physician pool."

Despite these advantages, public perception of managed care and market-driven healthcare remains largely negative. "In spite of these things that managed care can do that are thought to be in society's interests, people aren't celebrating managed care," Schroeder said. "In fact, a recent survey showed that the only industry held in worst repute than managed care is the tobacco industry."

Physicians view the managed care system as rationing of care, he said, and perceive a loss of autonomy. Patients, too, see the system denying them services they want. "There is no citizenry in the world as fussy or fastidious as that of the United States," said Shroeder. A market-driven healthcare system may also fail to support the public good that was previously "cross-subsidized in an inefficient, but important, manner," he said.

Academic medical center research, for example, had long been cross-subsidized by patient-care dollars generated through an academic hospital. "This cross-fertilization is going to be in jeopardy," he said. Care for the indigent and the growing number of uninsured individuals may also suffer in a managed-care environment. "Businesses are looking to use the hospitals with the lowest prices," Schroeder said.

"And how do you lower prices? You don't do the things you don't get paid for. If you're in the for-profit game, you say that you don't need to give much charity care because you pay taxes and the not-for-profit hospitals don't. At the same time, the public hospitals--the traditional safety-net hospitals--are falling victim to the political imperative to cut back state taxes."

In the future, Schroeder also sees lower physician income in an increasingly competitive market. "In most medical schools, clinical income has become the dominant source of income for the faculty," Schroeder said. "That cannot continue. We've been good at turning out our competitors who work in the community hospitals and can do things cheaper." Schroeder ended his talk by urging the audience to avoid overdramatizing the disadvantages of market-driven healthcare.

"The market genie is out of the bottle, and the system's changes will take place at different rates in different places," he said. "Ultimately, the tensions will be between the forces of the market; the court of public opinion about what to do about research, medical education and indigent care; and the leadership of the medical profession."

Schroeder was the 28th Weil speaker. The Weil lectureship, established in 1960 and named in honor of the past president of the Touro Infirmary board of managers, is sponsored jointly by the Tulane and LSU medical schools and Touro Infirmary. Past lecturers have included anthropologist Margaret Mead; Jonas Salk, inventor of the polio vaccine; and David Kessler, commissioner of the U.S. Food and Drug Administration.

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